Iron Condors

What is an Iron Condor?

An iron condor is a neutral options strategy that makes money if the underlying stock remains within a certain range. In order to open an iron condor position, you sell;

- a bear call spread

- a bull put spread

You keep the entire premium if the underlying finishes;

- above the short leg of the bull put spread

- below the short left of the bear call spread 

Please see below a demonstration.

 

What edge do iron condors give to investors?

The single most important benefit of the iron condor strategy is that it completely removes the need of guessing the direction of the underlying. An IC trader does not care which way the stock goes as long as it stays between the short legs of the two spreads. Therefore, it is called a neutral strategy. An IC play would lose if the stock makes a bigger than expected move in a particular direction.

When do iron condors work best?

ICs work best when the market is choppy (very much like 2022 market so far) and do not trend heavily in a single direction. Strong bull markets like we have seen in 2020 and 2021 are better suited for single direction trades such as debit call spreads and credit put spreads. As shown in my videos, nearly all my IC trades are green and set to make near full profit in 2022 so far. 

Another key metric that needs to be observed when selling ICs is the VIX.

VIX is the volatility/fear index in S&P 500.

When VIX goes up, options premiums go up.

A trader collects more IC premium for the same width of the legs when the VIX is high.

Therefore, selling an IC to a high VIX market can easily result in good profits when the VIX dips. 

 

I did not miss the opportunities 38-VIX-market provided a few weeks ago and sold quite a few ICs. VIX currently tracks in low/mid 20s which has resulted in relatively easy profits.

As a technical indicator, I typically watch VIX vs the Bollinger Band and if it hits the upper envolope of the Bollinger Band, I like selling ICs on the major indices.

For further information on my IC plays and underlying rationales please check my recent IC videos on my YT channel.