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What is an Iron Condor?

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Published: 17Jul2007
Word count: 483
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The Iron Condor option trading strategy is purely a market neutral strategy. An Iron Condor is constructed using a bull put credit spread together with a bear call credit spread on the same underlying asset to create a market neutral position. Iron Condor Spread can be entered a one order (simultaneously selling both bull and bear spread at the same time) or it can be entered as 2 separate orders (a bull put spread and a bear call spread separately). We prefer the latter because we can collect more premium by timing our entries through the use of technical analysis. A market neutral position can be profitable in a bull, bear, or sideways market. Sometimes you may hear that this is a non-directional trading strategy.

Option friendly brokers (brokers who understand option trading) offer more leverage for Iron Condor positions as they provide margin relief because they know that you cannot suffer simultaneous loss for your bull put spread and bear call spread.

For example: Let's assume that SPX is trading at 1300. If you enter into a bull put position on SPX at 1220/1210 and a bear call spread at 1380/1390, your profit zone is between 1220 and 1380. This means that as long as SPX expires between this range, you will profit. Theoretically you cannot lose on both positions because SPX cannot be more than 1380 and less than 1220 at the same time.

Since you can only suffer 1 losing spread, option friendly brokers only require that you maintain cash for only one side of the Iron Condor. Normally, it would be the spread with least premium collected.

Using the same example, let's say that we have collected a premium of $0.60 for the bull put spread and $0.80 for the bear call spread – for a total premium collected of $1.40. Each spread requires $1000 per option contract and you write 10 contracts each. You will need a minimum of $10000 for 10 contracts. However, because you have collected $0.60 (the lesser of the 2 spreads), you will require only $9400 ($10,000 - $600) as cash requirement. Although you have written 20 contracts, only $9400 is required in your brokerage account.

Now here is the fun part. Your profit is $1400 for a risk of $8600. As long as SPX is within the profit zone of 1220 and 1380, the Iron Condor Spread will be profitable. The return for this Iron Condor position is 16.3% ($1400 divided by $8600).

Many professional traders use the Iron Condor Option Trading Strategy to increase their chances of success. Many have achieved a high winning ratio of 80% to 90%. When compounded, this strategy can accelerate your portfolio growth as well as your monthly income exponentially. Iron Condor Spread can be used as an aggressive trading strategy but smart traders will benefit fully using this approach as low risk investment strategy.

Market Neutral Strategies are powerful when applied correctly. Iron Condor and Credit Spread Trading are easy to apply with little or no monitoring required.

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