Most investments are made with the expectation that the price will go up. Some are made with the expectation that the price will move down.

Unfortunately, it is often the case that the price doesn't do a whole lot of moving at all. Wouldn't it be nice if you could make money when the markets didn't move? This is the beauty of options , and more specifically of the strategy known as the iron condor. How to Take Off Iron condors sound complicated, and they do take some time to learn, but they are a good way to make consistent profits.

In fact, some very profitable traders exclusively use iron condors. So what is an iron condor? There are two ways of looking at it. The first is as a pair of strangles , one short and one long, at outer strikes. The other way of looking at it is as two credit spreads: It is these two "wings" that give the iron condor its name.

These can be placed quite far from where the market is now, but the strict definition involves consecutive strike prices. Option Spreads Strategies A credit spread is essentially an option -selling strategy. Selling options allows investors to take advantage of the time premium and implied volatility that are inherent in options.

The credit spread is created by buying a far out-of-the-money option and selling a nearer, more expensive option.

This creates the credit, with the hope that both options expire worthless, allowing you to keep that credit. As long as the underlying does not cross over the strike price of the closer option, you get to keep the full credit.

This transaction does require a maintenance margin. Your broker will only ask that you have cash or securities in your account equal to the difference between the strikes minus the credit you received.

To create the full iron condor, all you need to do is add the credit put spread in a similar manner. Now you have an iron condor. Your potential return is Because this does not presently meet the Securities And Exchange Commission's SEC strict definition of an iron condor, you will be required to have the margin on both sides. If you use consecutive strikes, you will only have to hold margin on one side, but this clearly lowers the probability of success.

Policing The Securities Market: An Overview Of The SEC. Tips for a Smooth Flight There are several things to keep in mind when using this strategy.

The first is to stick with index options. They provide enough implied volatility to make a nice profit, but they don't have the real volatility that can wipe out your account very quickly. But there is another thing you must watch out for: If you have been paying attention and are good at math, you will have noticed that your potential loss is much higher than your potential gain.

This is because the probability that you are correct is very high. To avoid taking a full loss, if the market does what it normally does and trades in a range, then you don't need to do anything and you can let the whole position expire worthless. In this case, you get to keep your full credit. However, if the market moves strongly in one direction or another and approaches or breaks through one of your strikes, then you must exit that side of the position.

Avoiding a Bumpy Landing There are many ways to get out of one side of an iron condor.

Options Trading With The Iron Condor

One is to simply sell that particular credit spread and hold the other side. Another is to get out of the whole iron condor. This will depend on how long you have left until the expiration.

You can also roll the losing side to a further out-of-the-money strike. There are many possibilities here, and the real art of the iron condor lies in the risk management. If you can do well on this side, you have a strategy that puts probability, option time premium selling and implied volatility on your side.

Let's use another example. With the RUT at roughly , you could put on the following iron condor:.

The Bottom Line The iron condor option strategy is one of the best ways for an option trader to profit from an insignificant move in the price of an underlying asset.

Many traders believe that a large move upward or downward is needed for them to make a profit, but as you've learned from the above strategy, handsome profits are possible when the price of the asset does not really move far.

The structure of this strategy may seem confusing at first, which is why it is used primarily by experienced traders, but don't let the complicated structure intimidate you away from learning more about this powerful trading method.

Dictionary Term Of The Day. A measure of what it costs an investment company to operate a mutual fund. Latest Videos PeerStreet Offers New Way to Bet on Housing New to Buying Bitcoin? This Mistake Could Cost You Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. Options Trading With The Iron Condor By Chris McKhann Share.

With the RUT at roughly , you could put on the following iron condor: Understanding the right way to execute an iron condor can increase potential returns and limit risk. Do the rewards outweigh the risks for this trading strategy? Read on to find out.

Options Trading With The Iron Condor

This market-neutral strategy isn't for everyone. Read on to find out if it is for you. Use this modification of an iron condor to reduce risk and increase your chance at profiting on the trade.

Iron condor - Wikipedia

A credit spread has two different meanings, one referring to bonds, the other to options. We tell you about four option strategies that could provide a way to pay off your debt. These five strategies are used by traders to capitalize on stocks or securities that exhibit high volatility. Beginning traders often ask not when they should buy options, but rather, when they should sell them. This relatively simple strategy is designed to provide a profit for investors who believe that there will be minimal price movement in the underlying security until expiration.

Understand how options may be used in both bullish and bearish markets, and learn the basics of options pricing and certain Find out more about option spread strategies, and how to set the strike prices for bull call spreads and bull put spreads An expense ratio is determined through an annual A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies.

A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all A legal agreement created by the courts between two parties who did not have a previous obligation to each other.

A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. A statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over No thanks, I prefer not making money. Content Library Articles Terms Videos Guides Slideshows FAQs Calculators Chart Advisor Stock Analysis Stock Simulator FXtrader Exam Prep Quizzer Net Worth Calculator.

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