Formidable as it sounds, the iron condor simply refers to a combination of two options strategies: the bull put spread and the bear call spread. Options, of course, are contracts to buy or sell financial instruments. Here, the objective is to profit in instances when the underlying security has low volatility. In and of themselves, iron condors are relatively straightforward in their mechanics according to investment education site Learning Markets. When trading this strategy, rules-of-thumb apply.
To buy an iron condor, you actually sell a call spread and a put spread with the same expiration on the same underlying instrument. The bull put spread portion of the iron condor involves a) selling an out-of-the-money put, which has no intrinsic value, and b) buying an out-of-the-money put with a lower strike price, being the price at which the option is exercisable. The bear call portion of the iron condor involves selling an out-of-the-money call and buying an out-of-the-money call with a higher strike price. The underlying instrument may be a broad-based index, individual stocks or smaller indices.
In the pre-trade phase, you'll be concerned with pinpointing a profitability range and determining position size and strike prices. Position size should be clear-cut, says Learning Markets, as it will be based on a predetermined percentage allotted to any given position. The strike price depends on your risk tolerance. Options trading resource Options Trading IQ recommends you don't rush in until conditions ripen and are confirmed by technical indicators. This might narrow your trading opportunities to only three or four positions per year.
Learning Markets says you can fiddle around with an iron condor once it's in play. You do have to be sure the changes you make are for trades you would've made even if they weren't adjustments. Examples include closing a losing iron condor and reentering a new spread that has more time to expire, making the sold strike prices closer, or adjusting the position size to offset losses.
Flying the Coop
Getting out of an iron condor should be a function of time and not price, says financial tradeshow sponsor "Money Show." It recommends bowing out four to 10 calendar days before the expiration date. If you're antsy, exit half of it 10 days before and the other half at the four day mark. Nonetheless, the options mentoring program Trading Concepts recommends you may want to get out early even if you are profitable. This can happen with large indices that face settlement risk, or when you've reached the point of maximum endurable loss.
"Money Show" says not to exit or enter into any iron condors on Wednesday, Thursday or Friday of expiration week. During this time, electronic servers are tightening bid/ask spreads, making it a precarious time to jump in or out. It further recommends entering into iron condors between four and 10 weeks before expiration.
- BananaStock/BananaStock/Getty Images
- How to Buy & Sell Volatile Stocks
- Tips & Tricks for Trading Futures
- Stock Options Cheat Sheet
- How Do I Buy Day Stocks?
- What is the Difference Between a Bear & Bull Stock Market?
- How to Trade Options in a Bear Market
- Strategies for Trading During Options Expiration Week
- How to Put Straddles on Volatile Stocks