Iron condor trading strategy is one of the options trading strategies with limited risk involved. It allows you to take the benefit of low volatility, time decay, or little to no movement in an underlying asset.
This strategy involves both call-and-put options and allows the traders to generate profit based on stock price actions in a relatively stable market. In this article, we have mentioned everything required to understand the iron condor options trading strategy and how it works. Without any further delay, let’s begin the guide.
What is an Iron Condor?
An iron condor refers to a directionally neutral trading strategy that allows traders to make a profit from the relatively stable or sideways-moving stock market. Here, traders have to extract the profit when the stock remains range-bounded because the option’s expiration date inches closer.
Iron condor options strategy consists of four legs, including long put, short put, long call, and short call. Plus, it also has four strike prices with the same expiration date.
Traders make the most profit when the selected underlying asset closes between the middle strike prices at expiration. You can opt for Upsurge.club’s option trading course for beginners to deepen your understanding.
How does Iron Condor Work?
An Iron Condor is a type of options strategy that involves four different options: two puts (one long and one short) and two calls (one long and one short). These options share the same expiration date, but their strike prices vary.
Here’s how it works:
- Buy one Out of The Money (OTM) Put: This option has a strike price below the current price of the underlying asset. It protects against a significant downside move.
- Sell one OTM or At The Money (ATM) Put: This option has a strike price closer to the current price of the underlying asset.
- Sell one OTM or ATM Call: This option has a strike price above the current price of the underlying asset.
- Buy one OTM Call: This option has a strike price further above the current price of the underlying asset. It protects against a substantial upside move.
An Iron Condor strategy is aimed at making money from low volatility in the underlying security. The maximum gain comes when the underlying asset closes between the middle strikes on the expiration date.
The Iron Condor approach has a capped risk on both the upside and downside, as the options with high and low strike prices safeguard against substantial moves in either direction. Due to this limited risk, its profit potential is also capped.
When Should You Use Iron Condor Trading Strategies?
An Iron Condor trading strategy is best utilized when you expect the underlying asset to remain within a specific price range, as it profits from low volatility.
It’s particularly effective during periods of increased volatility, as the heightened option prices can lead to greater potential profit.
The strategy involves selling an out of the money put spread and an out of the money call spread simultaneously, making it a good choice for balancing risk management with strike selection and expiration timing.
To Wrap Up!
Iron Condor is an options trading strategy that helps traders profit from the relatively stable underlying asset. Traders set up two call options and two put options. However, it’s not about achieving the greatest profit, but rather about maximizing the potential for profit within a specific, defined risk range.
You can also enroll in some of the best option trading courses from Upsurge.club to clarify your concepts. We hope this article helps you understand everything about the iron condor strategy.