An iron condor can help you profit from a sideways or range-bound market. This position can also potentially profit from a decline in implied volatility.
An iron condor is simply the sale of a call spread and a put spread that are outside of an expected trading range. The size of these spreads, otherwise known as “wings” can be adjusted based on risk tolerance and profit objectives.
Here are the steps to identifying an iron condor trade:
- Identify a market that has traded within a range for a period of time
- Determine if implied volatility (IV) levels are relatively high or relatively low
- Look at both call and put credit spreads outside of the trading range
- An opportunity may potentially exist if you can sell a call spread and a put spread for a net credit that is equal to or greater than 20% of the total amount risked on the trade.
Despite being touted as a “set and forget” strategy, risk must still be managed no matter what. Don’t forget to always do your due diligence with any type of trading.
Think about this: If you make one dollar four times and then lose five dollars on the fifth attempt, you are down one dollar. In other words, it is really important to avoid taking maximum losses on an iron condor position. While these trades may potentially have a high winning percentage, heavy losses on a single trade can wipe out several winning trades. Bottom line: it’s fun to win, but don’t get so caught up and get greedy about it.
Let me know you plan on trying this out and how it works for you.