Understanding
Stock Options Trading
and Technical Analysis Basics

Iron Condor Options

Iron Condor options are an advanced option trading strategy that use 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 - Buy 1 further OTM Put, Sell 1 OTM Put, Sell 1 OTM Call, Buy 1 further OTM Call
Long Iron Condor - Buy 1 further OTM Put, Sell 1 OTM Put, Sell 1 OTM Call, Buy 1 further OTM Call

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.

Iron Condor options are 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.

Summary:

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.