Understanding
Stock Options Trading
and Technical Analysis Basics

Iron Condors

The Iron Condor is an advanced option trading strategy that uses a combination of two vertical spreads. A call spread is opened at strike prices that are higher than the underlying stock's current price, and a put spread is opened at strike prices that are lower than the current price.

The Long Iron Condor is the most common form of the Iron Condor and is one of the more popular advanced strategies recommended by option trading instructors. It is a strategy that is close to a "sure bet", allowing for a modest profit with enough room for error. However, it is meant for stocks that are not volatile and have a neutral trading range, and the potential losses (while limited) are quite high if the underlying stock price ends up moving too far when the options expire.

The Long Iron Condor position is opened by creating a bearish call spread and a bullish put spread. The call spread is created by selling an Out-Of-the-Money (OTM) call option, and buying another call option that is further OTM. The put spread is created by selling an OTM put option, and buying another put option that is further OTM. Both spreads are credit spreads, and will give you a net income when the position is opened.

Long iron condor individual components

Long iron condor composite

With this combination of spreads, you are creating a target price range between the inner OTM call strike price and the inner OTM put strike price. If the underlying stock price stays within this range come expiry time, all 4 options will expire worthless and you get to keep your initial credit income. If the stock becomes more volatile than expected and ends up outside this price range, you will need to close the now In-the-Money (ITM) positions, thus reducing your profit and causing a net loss.

The Long Iron Condor is a neutral trading strategy for non-volatile stocks, and is similar to the Long Butterfly and the Short Strangle strategies, but with a few differences. While the Short Strangle has unlimited risk/loss if the stock price changes drastically, the Long Iron Condor has a limited maximum loss. And while the Long Butterfly achieves maximum profit if the stock price doesn't move at all, the Long Iron Condor has a wider price range to gain its maximum profit. This price range can also be controlled. You can make the range narrower to receive more initial credit income, but at the risk of the stock's price ending up outside this range.

However, the Long Iron Condor does have a big weakness in that it is composed of 4 individual options, and (depending on your broker) will incur a lot more commission costs compared to the other strategies. In addition, the maximum potential loss incurred is usually more than the initial credit income you receive when opening this position. These factors combine to make the Long Iron Condor potentially less profitable than it looks on paper, and you will need to analyze how appropriate it is for you after taking into account your commission costs.

Easy-speak A Long Iron Condor involves creating an OTM bearish call spread and an OTM bullish put spread. It is a neutral low-risk strategy for low volatility stocks. You retain limited credit income if the stock price remains inside a price range. You will incur limited losses if the stock climbs too high or falls too low.

The Short Iron Condor works in the opposite way, and is used for volatile stocks. Instead of opening an OTM bearish call spread and an OTM bullish put spread, a Short Iron Condor is constructed by opening an OTM BULLISH CALL spread and an OTM BEARISH PUT spread. You buy an OTM call and sell a call that is further OTM. And you buy an OTM put and sell a put that is further OTM. This creates a debit spread situation, where you need to pay the difference in premiums when you open the position.

Short iron condor individual components

Short iron condor composite

What the Short Iron Condor does is create a profit profile that is the exact inverse of the Long Iron Condor. If the underlying stock price remains between the two inner strike prices, all the individual options expire worthless and you don't get to make any profit. You will only achieve maximum profit when the stock's price moves a lot, and you can close the position by selling whichever options are now ITM. It is therefore a strategy that is high in volatility but neutral in direction.

Similar to the Long Iron Condor, the Short Iron Condor also suffers from the fact that the commission costs for the 4 individual options can become prohibitively expensive. There are also other strategies that fit a similar profit profile and are more suitable for volatile stocks. Both the Straddle and Long Strangle strategies reward you if the stock price changes a lot. They also cost less in commission, since only 2 individual options are involved in each case. But most importantly, neither of these strategies limit your profits when the stock price moves a lot, while there is a limited maximum profit for the Short Iron Condor.

Easy-speak A Short Iron Condor is opened by creating an OTM bullish call spread and an OTM bearish put spread. It is a strategy that is high in volatility but neutral in direction, giving you limited profits if the stock price moves a lot, and limited losses if the stock price doesn't move. There are other more optimum strategies for this profit profile.

Other Topics in this Guide

Bullish Strategies Bearish Strategies Neutral Non-Volatile Strategies Neutral Volatile Strategies

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