Iron Condor Spread


Iron Condor Spread is the name given to a variation of the Condor Spread.The 'iron' part indicates that some part of the strategy is modified. Either the protective wings of the spread are further apart than the regular condor which means that the net credit taken in is larger, along with the correspondingly higher risk, or the profit zone is wider, or a combination of some or all of the above.

Conventionally, the ideal time to put on the iron condor spread is when the stock is midway between the strike prices of the two short options being sold.

However, in order to maximize the profit, many sophisticated traders prefer to 'morph' or 'leg' into the iron condor spread one 'leg' at a time.

To pull this off requires the trader to be competent at the art of technical analysis.

Here's how it works:

Suppose a trader identifies a high pivot point bar, signaling the possible end of an up swing, and immediately sells the nearest at-the-money or closest out-of-the-money Call with acceptable premium and simultaneously buys a further out-of-the-money Call, for less premium, as the protective wing of the spread.

What the trader has accomplished, thus far, is having established a very attractive limited risk bearish Call Spread at or slightly away from the market, put on for the largest possible credit, at precisely the optimum time.

If the trader's judgment is correct, the market trends lower until another pivot point is identified, signaling the possible end of a down swing, at which time the trader, anticipating an imminent return to an upswing, sells an at or slightly out of the money Put while simultaneously buying the next strike further down, for less premium, as the protective wing of this also limited risk 'leg', thus completing or 'morphing' into the 'iron condor' spread.

And (are you ready for this?) at absolutely no further increase in margin required. Plus, this position has a huge profit zone in the middle.

Possible follow-up action, should the market move adversely toward the trader, would be to adjust, or 'roll', the particular part of the position under attack upward or downward as needed and, possibly, further out in time.

Nothing need be done with that part of the position not under attack. It will simply expire worthless and the trader, having 'pocketed' the premium taken in, will move on to the next trade.

Spread traders, typically, sell the 'front' months with 45 to 30 days of time remaining till expiration.

While not 'risk free', the trader has systematically, step-by-step, managed to improve the odds of success in the traders favor for this iron condor spread position.

Many traders, interested in selling 'credit spreads', can utilze this strategy over, and over again, continuously.

It works particularly well using US Treasury bills as margin collateral.

Sellers of credit spreads often think of their trading operations as being similar in nature to those of insurance companies that continuously take in premium and reinvest the proceeds. Losses incurred would be 'claims' against the insurance company's book of business.

They're middle men. They don't have to forecast where the stock is going to go in order to be successful. They just have to figure out where the stock is not going to go. They profit as long as the stock stays within a range of prices.

Gambling casinos do much the same thing. Be the 'house'. Not a bad strategy.

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