Iron Condor Options Trading Strategy (2024)

FAQs

Iron Condor Options Trading Strategy? ›

An iron condor is an options strategy consisting of two puts (one long and one short) and two calls (one long and one short), and four strike prices, all with the same expiration date. The iron condor earns the maximum profit when the underlying asset closes between the middle strike prices at expiration.

There is always risk with options trading, but an iron condor is one of the safer strategies since risk is defined upfront, and you control what that risk is on trade entry.

Based on historical data, the Iron Condor success rate ranges from 60-70%. This means 6-7 out of 10 trades using this strategy are profitable.

The index iron condor options strategy is popular because it's relatively easy to understand, it doesn't require options analysis software to visualize the trade, and it generates an excellent monthly income of 6% to 10% ROI per month.

When you sell the call and put spreads, you are buying the iron condor. The cash collected represents the maximum profit for the position. It represents a 'market neutral' trade, meaning there is no inherent bullish or bearish bias.

A Bull Call Spread is made by purchasing one call option and concurrently selling another call option with a lower cost and a higher strike price, both of which have the same expiration date. Furthermore, this is considered the best option selling strategy.

The iron condor strategy has limited upside and downside risk because the high and low strike options, the wings, protect against significant moves in either direction. Because of this limited risk, its profit potential is also limited.

For the iron condor strategy autotrade the minimum to get started is $6500; $5000 is traded and $1500 for reserve cash (30% reserve cash). The next increment up for autotrade is $13,000; $10,000 is traded and $3000 for reserves. For autotrade, the account size increases in $5000 increments, plus 30% in reserve cash.

Exiting an Iron Condor

Any time before expiration, there may be opportunities to close the position for a profit by exiting the full position, exiting one spread, or buying back only the short options. If the options are purchased for less money than they were sold, the strategy will be profitable.

NSE's new margin framework works wonders here; the upfront margin for an iron condor is just Rs. 44,303/-, significantly lower than the short strangle's Rs. 1.45L requirement. Previously, retail traders found it difficult to execute an iron condor because of the high margin required.

Which is better, strangle or iron condor? ›

Stated differently, the short strangle has a higher probability of profit. However, with less premium comes less risk. The iron condor can be viewed as a short call vertical spread⁶ and a short put vertical spread. In a short call vertical, a trader sells a short call and buys a call with a higher strike.

S&P 500 Iron Condor Spread Example

Imagine that the S&P 500 is at 4,330. To set up an Iron Condor spread, you might buy a 4,500 call option (orange dot below point four on the above chart) for $2.20 and sell a 4,450 call (orange dot above point three) for $4.20. This produces a credit of $2 in your account.

An iron butterfly is a position with a higher risk and higher reward. An iron butterfly might collect more premiums than an iron condor since its short bets are positioned close to or at the asset's current price. If everything works well, you can always make extra money with an iron butterfly.

If the stock closes below $80 or above $120 at expiration, you would incur the maximum theoretical loss of $8 per spread. In this scenario, one side of the iron condor would expire worthless and the other will be trading at maximum value ($10).

1. Selling Covered Calls – The Best Options Trading Strategy Overall. The What: Selling a covered call obligates you to sell 100 shares of the stock at the designated strike price on or before the expiration date. For taking on this obligation, you will be paid a premium.

The best strategy for option trading is to thoroughly research and understand the underlying assets, assess market conditions, employ risk management techniques, and consider using a combination of strategies such as covered calls, protective puts, and spreads to mitigate risks and maximize potential profits.