An iron condor is typically a non-directional option spread where the trader sells an out of the money call spread and an out of the money put spread (“the wings”) in an effort to collect option premium while the stock maintains a trading range. For example, if the stock has been maintaining a range from $95-$105, the trader might consider selling the $90 puts and buying the $85 puts on one side and selling the $110 calls and buying the $115 calls for a net credit. The distance between the strike prices can vary. The wider the distance between the strike prices, the greater the margin requirement and risk. This trade can only get in trouble on one side or the other, but not both. This is also known as a condor, and the strategy often uses index options because the chance or a major move is diminished as a result of diversification. This strategy can be effective when a stock is caught in a defined trading range. It’s important to buy in the losing side of the spread if the stock breaks out. The problem with this strategy is that the profits are small (but consistent). Many months of winning trades can be destroyed by one bad trade. A handful of decisions each year will determine your success trading iron condors.
Iron Condor Spread
January 2, 20092 min read