An Essential Guide to Iron Condor Trading Strategies

If you are a newcomer to options trading, you probably don’t realize that you have an immense amount of options out there (no pun intended). You will have strategies such as “covered call”, “married put”, “protective collar”, “long straddle”, “long strangle” and many others. One strategy that continues to increase in popularity would be the Iron Condor strategy, and if you are interested in investigating this option, then the following information will be of interest to you:

The Iron Condor Strategy Defined

One of the main reasons why the iron condor options trading continues to grow in popularity is because it focuses on non-movement on the given underlying stock price. How does an Iron Condor strategy benefit from a stock price that no longer moves? It does so because this strategy will take advantage of other factors like the volatility contraction and the time decay of the stock itself.

Part of the reason for this is because this strategy makes you a net seller of the option premiums and this means that you are receiving cash upfront. Of course, several factors come into play regarding whether the investor will get to keep the cash that you receive upfront. According to TastyTrade, “..an Iron Condor strategy is “directionally neutral” and it is one of those investments that will simply benefit from “the passage of time.” For now, let’s now take a look at the different components of an iron condor investment:

Different Building Blocks

First of all, you have to look at the different building blocks. There are four of them, including Sell 1, a put out of the money function; Buy 1, which is an option for being further out of the money; Sell 1 Call, which is another option for an out of the money description; and Buy 1 Call, which is yet another option for those that are further out of that money.

Similar to Credit Spreads

If you have a lot of experience with vertical spreads, then chances are you’ve probably realized that one of the hallmarks of an iron condor approach is that it is similar to this. It also can be described as a combination of a short put credit spread and a short call credit spread together.

A Strategy That is Nice and Neutral

One of the most appealing aspects of this strategy is that it is nice and neutral. Thus, one of the hallmarks of this strategy would be to keep the stock price between the two short strikes that you want to sell. Thus, as long as you have cooperation with the stock price, you will have the ability to take advantage of the volatility contraction and time decay aspect of this investment.

Time Decay

Finally, part of the reason why the principle of “time decay” works out well for you in this case is that even if you are completely wrong on which direction that the stock price goes, as long as it stays within your predetermined range, you will make money.

If done correctly, the iron condor trading strategy can be a solid investment strategy.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.