Sunday, December 16, 2012

The Iron Condor Spread - Using The Iron Condor Plays To Reel In Option Grocery Money

By Chuck Mears

What exactly is the iron condor? This is a trade that makes profit when the underlying market being used is range bound. Savvy option traders try to implement trades that are best suited for - and that take advantage of - whatever type of movements are occurring in the market. However, many times the options being use expire worthless due to the fact that many times there is no significant movement in the market. These types of trading range markets are ideally suited for the iron condor option trading strategy.

Creating the iron condor can be thought of as merging one short and one long strangle paired together at two outer strikes. A strangle trade is the purchase of options on either side of where the underlying is trading - one put and one call option. Strangles' premiums are less than those of straddles due to the fact that the contracts are out of the money. Another way you can look at the iron condor strategy is to think of it as two credit spreads placed at the same time - a put credit spread and a call credit spread. The trade has purchased calls and put options above and below the short options to protect from a large unforeseen movement in the underlying.

Pretend that you purchase the 1280 SPX and you buy the august call at the level for a credit of two hundred - and right at the same time you buy the august put options for about $4.65. It's important to choose an options friendly broker to help keep your margin under control and in the long run provide better returns. You would need around thirteen hundred twenty dollars in order to trade this spread.

This is what it would look like:

1380 at $2.45

1355 @ 4.50

That means that the premium that has been brought in is right around 2 dollars.

Here it is broken down - $15 dollars minus $2 dollars: $13 dollars - times 1 spread of one hundred contracts of the underlying = $1,350

Just as long as the underlying stays below the short strike levels the entire credit that was pulled into the account can be kept - which can be a very good short term return.

This is the call side spread of the iron condor trade we are referring to. To complete the entire iron condor, you would just add a put spread down below where the underlying is trading.

This trading strategy can work wonderfully if you know what you are doing and the market conditions are right - and there are some option traders who use it as their primary trading strategy. However, of course there are risks involved.

Some important things to consider when trading the iron condor is knowing which underlying to utilize - along with understanding when and how to properly place, adjust and exit the position. Knowing how to manage and adjust is the real key to being successful trading the iron condor trade. If you don't understand this strategy fully - or if you have a game plan that you will follow strictly - could be your downfall and wind up costing you significant losses. Try to guess how I know.

About the Author:

monte escalier


Post a Comment