Short Iron Condor

 

“The short iron condor is a limited risk/reward play”

 

Overview/General Remarks

The short iron condor is likely the most popular of all options strategies and generally for good reason. The short iron condor has the ability to profit within a price range and rather than an outlay of cash at entry a credit is received.

Depending on the strike width selected the iron condor can be very effective and I would encourage any new or experienced investor to consider it apart of their strategy tool belt.

I would likely prefer the short iron condor in periods of increased volatility after a substantial move has occurred. The iron condor is easily adjustable after entry to account for a change in market conditions. However, when making adjustments be sure to account for the original position as well as the “new or adjusted position”. Also be sure not to adjust to early as price can pull back into the required range.

 

Expectations

Employ this strategy when price is expected to stay within the range of the selected short strikes.

 

Setup/Construction

Essentially, the sell of a bear call spread and a bull put spread. For a review of the bear call spread click here. For a review of the bull put spread click here.

WARNING – the short iron condor consists of a closer to the money short call and short put. Be aware of the obligations. For a review of these obligations view the basics of stock options page here.

 

Example Short Iron Condor Spread

Example trade on SPY et. Click to Enlarge.

 

 

Max Reward/Loss

Reward is the credit received = .57 or $57

Loss is the strike width minus credit received = $1 – .57 = $.43 or $43

The horizontal sections at either side represent the max loss at expiration. The horizontal section in the center represents the max profit. The dashed vertical lines represent the break even prices for this particular trade.

 

Price Assumptions

Price will remain within the boundary of the selected spreads. Ideally within the two short strikes.

 

Key Benefits of the Short Iron Condor

– Hedged position

– Credit received at entry

– Minimal risk

– Reduced margin requirement

– Easy to adjust

 

“The Greeks”

Again, this is a multiple contract position. Be sure to view the net greek values to determine portfolio effect. For a review of the greeks click here.

 

Volatility

IV = 15.87%

IV Rank = 17.21%

Selling the iron condor in these market conditions would be at the sellers discretion. I prefer a higher volatility myself but this strategy is versatile and can be engaged in just about any market where price is range bound.

 

Liquidity

SPY remains a liquid vehicle. Just be sure to check open interest, volume, and bid/ask spreads prior to entering a position.

 

Probability ITM/OTM

The short iron condor expects price to remain within the range of spreads selected. Therefore it would be preferable to have both sides finish OTM, in this case the entire credit (max profit) would be retained. Inverting the short iron condor would behave similarly to the long iron condor only the risk/reward paradigm is altered. Thus, it would be an unfavorable position in most instances.

 

Final Thoughts

The short iron condor is a great place for new traders to test the option’s water. They offer many benefits discussed above and with the exception of increased commissions they’re a great way to get a feel for the basics.

The short iron condor could likely be the only option strategy a trader would ever need to consistently pull money out of the market.

Did I forget something important? Let me know below.

 

Disclaimer

U.S. Government Required Disclaimer: Options trading products, services, and information are for educational purposes only. All information shared is confidential and proprietary. Your success with this content is entirely dependent upon your actions. You are required to do you own research and due diligence. Options trading products and training programs are for educational purposes only, and are provided with the understanding that I’m not a registered investment adviser and nothing herein shall be construed as a solicitation and/or recommendation to buy, sell, or hold any financial instruments.

Recognize that the purchase of, sale of, or giving of advice regarding foreign currencies, commodities, stocks, options or futures can only be performed by a licensed, registered or exempt person. Understand that I do not solicit or execute trades or give investment advice, I am not registered as a broker or adviser with any federal or state agency, and encourage consultation with a licensed representative or registered investment professional prior to making any particular investment or using any investment strategy. Stock and options trading has large potential rewards but also involves large potential risks, and that as an investor, you should only use and/or risk capital you are prepared to lose.

This program is intended solely for the avocation, personal enrichment, and enjoyment of students. Your success depends on your unique skills, time commitment, and individual effort. Recognize that neither unique experiences, past performances, historical tests, nor included or accessible strategies, scans, or patterns constitute recommendations or guarantee future results. You are solely responsible for the selection of your own stocks, currencies, options, commodities, futures contracts, strategies, and scans, and monitoring your brokerage account(s), the programs and anything, including, without limitation, delays or outages of any type, which may adversely affect you.