Saturday, December 15, 2012

Iron Condor - Don't Lose Your Shirt

By Ted Nino

Before starting to trade the iron condor trading strategy, one should make sure they completely understand how the trade works and how to adjust the trade if needed. Have this plan thought out before you even ever place the trade. What if the market suddenly had a big move that was unexpected and put your account at risk? Just a couple of these can annihilate your account.

This trade can also be looked upon as a strangle trade that has been sold only with added wings for protection. A "strangle" is where a trader buys an an out-of-the-money call as well as an out-of-the-money put option. Strangles' premiums are less than those of straddles due to the fact that the contracts are out of the money. This is basically just a call option spread up above where the stock is trading at, and a put option spread position down below where the underlying is trading at. Your paired positions are the condor's wings.

It is imperative that you be prepared in advance for adjusting iron condors because your potential losses in this strategy are always substantially greater than your potential gains. This is largely because the way to success with the iron condor is by figuring out an approach that is high probability (you are probably right about what you anticipate). A big move either way - or even just a move in the underlying that is larger than you were expecting - can have disastrous results on your trade and your profits.

The Keys to Successful Iron Condor Strategy

- Understand that there a various methods to adjust the iron condor. You don't have any "mandatory" method for doing so that you must follow. 

- Do not let your position get out of control and into losses. 

- Never allow the inevitable small losses to morph into big losses. 

- Be happy with small steady wins.

Your key to success in trading this strategy is consistency in gaining profits. Remember - your account balance and your profits should always be protected. Adjusting iron condors must be done according to one or more pre-planned strategies whenever the possibility for a large loss looms.

When I was just starting out trading iron condors, I many times found myself booking impressive returns month after month - then always seemed to wind up somehow giving those gains back to the market during the usual one or two wild months the market threw at me. However, when I learned this ridiculously easy technique for trading the iron condor all that changed. After discovering my method, I now know exactly what to do when a problem month comes along to keep from losing the rest of my iron condor profits I've accumulated throughout the year.

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