Understanding
Stock Options Trading
and Technical Analysis Basics

Short Iron Condor Strategy

The Iron Condor strategy 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 Short Iron Condor strategy is used for volatile stocks. It is constructed by opening an out-of-the-money (OTM) bullish call spread and an out-of-the-money (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 - Sell 1 further OTM Put, Buy 1 OTM Put, Buy 1 OTM Call, Sell 1 further OTM Call
Short Iron Condor - Sell 1 further OTM Put, Buy 1 OTM Put, Buy 1 OTM Call, Sell 1 further OTM Call

What the Short Iron Condor does is create a profit profile that favors volatile stocks. 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.

The Short Iron Condor strategy 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.

Summary:

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.

The Long Iron Condor is the more popular iron condor strategy, and is used for neutral non-volatile stocks.