Iron Condor Option Strategy
What are the Characteristics of this Option Strategy?
The Iron Condor option strategy is a low-risk/high-reward trading strategy that is used for netting income from the markets. The strategy is a combination of two option spreads: a Bull Put spread and an Bear Call Spread, with the same expiration date. It is typically viewed as a net credit strategy because the cost of the two options sold will exceed the total premium that is used to buy the other two options
Is this a Bullish, Bearish or Neutral Strategy?
The Iron Condor option strategy is a neutral strategy. The goal of the strategy is to capture the net premiums received when entering the Iron Condor spread and then to close the trade (or break-even) when the market moves far enough away from the originally initiated range.
Is this a Beginner or an Advanced Option Strategy?
The Iron Condor option strategy is considered to be an advanced option strategy primarily due to the fact that it requires a certain level of proficiency when using options. It is also a relatively complex option strategy with a fairly large risk profile, so the trader must be comfortable with the risks associated with such a strategy.
In What Situation will I Use this Strategy?
The Iron Condor Option Strategy is typically used when the underlying asset is expected to remain within a particular price range. The trader must also have a fairly accurate model of the future volatility of the underlying asset in order to determine the correct strike prices and expiration date.
Where Does This Strategy Typically Fall in the Range of Risk-Reward and Probability of Profit?
The Iron Condor strategy typically falls into the low risk/high reward category, with an average probability of profit of 80-90%. The risk/reward ratio of an Iron Condor spread is generally 1:4, meaning that for every $1 risked, the potential profit is $4.
How is This Strategy Affected by the Greeks?
The Iron Condor strategy is primarily sensitive to changes in Implied Volatility, Delta, and Theta. The Vega/Volatility of the spreads will move as volatility changes in either direction. The Delta of the spread will usually decrease as the underlying asset moves away from the strike price. The Theta of the spread will usually be negative, as the option time premium decays over the life of the chosen options.
In What Volatility Regime (i.e VIX Level) Would This Strategy Be Optimal?
The Iron Condor strategy is typically best suited for use in markets experiencing below-average volatility as it allows the trader to capture more net premium into the spread. However, this can also be used in markets that experience high levels of volatility, as traders can use Iron Condors to take advantage of “vol-selling” opportunities.
How Do I Adjust This Strategy When the Trade Goes Against Me? And How Easy or Difficult is This Strategy to Adjust?
Adjustments to the Iron Condor strategy can be made fairly easily by “rolling” the spread to a new strike price and closer expiration. This can be done with either the same number of contracts, or with a larger/smaller size depending on the trader’s desired risk/reward profile.
Where Does This Strategy Typically Fall in the Range of Commissions and Fees?
The commissions and fees for Iron Condor trades typically fall in the low to moderate range. Since it involves buying/selling 4 options contract, the total commission fee is a bit on higher side
Is this a Good Option Income Strategy?
The Iron Condor Option Strategy is one of the best option income strategies available. It allows the trader to capture premium from the underlying asset without having to take on excessive amounts of risk. With a high probability of profit and a low risk profile, it is an excellent strategy for generating steady, consistent income.
How Do I Know When to Exit This Strategy?
Choosing when to exit the Iron Condor strategy can be difficult, as it depends heavily on the trader’s risk tolerance and the current market conditions. Traders usually close out the trade when the underlying asset has moved outside the expected range.
How Will Market Makers Respond to This Trade Being Opened?
When an Iron Condor strategy is opened, market makers will usually try to offset the spread with an opposing spread. This helps to reduce the risk for the market makers and also allows them to capture some of the net premium from the spread.
What is an Example (with Calculations) of This Strategy?
Consider a stock trading at a price of $265. A trader can execute iron condor option strategy by selling 1 call at $270, buying 1 call option at $275, selling 1 put at $260, buying 1 put option at $255. The investor enters this trade by paying a net premium of $260. If the stock stays between $260 to $270 at expiration, the investor will make a maximum profit of $260. If the stock breaks the range, the investor will make a maximum loss of $240. This can be seen in more detail with the Iron Condor Calculator here, or with the Short Iron Butterfly Calculator here.
Conclusion
The Iron Condor strategy is a low-risk/high-reward options trading strategy that can be used to generate consistent income from the markets. It is considered to be an advanced option strategy, as it requires a certain level of proficiency and understanding of the risks involved. It can be used in both low and high volatility markets, but is best suited for low volatility environments.
The Iron Condor Option Strategy can be managed and tracked easily and accurately with the help of tools such as MarketXLS. MarketXLS is the leader in financial analytics tools and makes it easy to calculate trades and track your performance over time. MarketXLS also provides a range of option analytics and spread calculator tools to help traders identify optimal entries and exits for the Iron Condor strategy.
Here are some templates that you can use to create your own models
Iron Condor Option Strategy
Call Condor Spread
Reverse Iron Condor Spread
Reverse Iron Albatross Spread
Search for all Templates here: https://marketxls.com/templates/
Relevant blogs that you can read to learn more about the topic
“How Iron Condor and Strangle Options Differ”
Option Strategies For Professional Traders
Iron Condor Options Strategy – Video Explanation
Reverse Iron Condor Options Strategy (Using Excel Template)
Cut Complexity with Call Condor Spreadsheets