Iron Condors: Everything You Need To Know
Iron condors are popular option strategies that are used by various professionals’ especially individual investors and money managers.
Before we step into anything, first it is important to note what an iron condor is.
What Is An Iron Condor?
Iron condors are a popular option strategy that has four different types of contracts. Some of the most important features of iron condors are:
An iron condor spread is made by selling a call spread and then one put spread with the same kind of expiration day on the exact same underlying instrument.
All of the four options in iron condors are usually out of the money but this is not a strict requirement.
These options represent a market neutral trade, which means there is no kind of inherent bearish bias or bullish bias.
When you are buying the iron condor, you sell the call and put the spreads. The cash that is collected represents the total profit for a position.
The underlying asset in iron condors is usually a broad based market index such as the RUT or the NDX. However, a lot of people choose to buy the iron condor position or own one on smaller indexes or individual stocks.
There are different ways through which iron condors make or lose money both. When you own such an option, it is better to have it in a narrow trading range from the time that you open the position to the time that the option expires. When it is its expiration time, if all the options are then out of the money, they will expire worthless and you will have all the money that you collected when you bought them in the first place. However, not such ideal situations happen all the time here.
Iron condors are an incredible option strategy especially in neutral markets. However, the difference lies when the market is trending lower or higher. Some suggest closing the option before the potential profit arises or before its expiration date and even though this might mean letting go of some of the profit, it still means safety in many ways.
There are times when the market can be a bit volatile or the prices of the under lying assets can be the same. The underlying assets might change in terms of price changes and this is where you need to consider how to go about selling your options. The best way to think is to realize how much money can you lose or then what can you do when the market misbehaves. With both things, you can be wise about which direction to take.
One of the biggest advantages iron condors offer is that with them, you don’t need to know which direction is the market headed in. Iron condors generally do have a lot of advantages to offer.
Firstly, these options help you yield a decent monthly income on a succinct basis because these are a high probability trade. Even if they are traded over a period of time, they are able to help you draw consistent returns. These trades are also not focused on a particular price level but they can allow you for greater controlled risk and greater returns.
Iron condors also have a theta decay mechanism, which is called a rapid decay as well. This particular element of these options is also the one to watch for more than one obvious reason.
Making Money With Iron Condors
The whole point of discussing iron condors is to help one realize how they can make money with them.
If for instance an option expires, the stock price will struggle between the short strike prices and then the trade will be profitable. It depends on their volatility and the prices of the options so it is better to close out the trade before its expiration if you want to profit.
Iron condors are a popular choice amongst people with smaller accounts and beginners as well because you can define your maximum loss when you choose a strike price at the order entry. This is called a defined risk trade but it requires simmered down buying power for the trader, which then frees up the capital to other places of trades.
Iron condors are a mixture of short put spread and a short call spread. They are neutral and they define risk trade- they are good for the small account and the new traders as well. For someone who wants to make a profit off these options, they would want the stock price to stay in between the two short strike price and would want the volatility to drop as well. For these options, the max loss is observed in the width of the wings and the less credit received.
Iron condors are a profitable option and their use is quite wide spread now because they allow traders to minimize their losses and to increase their gains. Iron condors work in a very easy to understand manner and they are basic options that help you earn a lot of good money if you are careful about your trades.
Iron condors give you the ability to minimize your losses and increase your gains. They are also very safe to use and can be used by new traders any day as they do not require a lot of time, effort or energy. Just a few tips and techniques can make a lot of difference with them.
The benefit of iron condors can be reached and reaped the most once you try to start selling them. They are now a popular type of option so you can also sell these without worrying about the right time. Iron condors also do not function depending on the market’s behavior so these options function independently and give you a great option to benefit from your trades by making the most amount of profit. Iron condors have risen in popularity over time and provide an excellent option for new traders.