Iron-condors-credit-spreads-trading

Iron-condors-credit-spread-trading

IRON CONDOR TRADING is an option strategy used by many professional traders and and income generation tool. Its a combination of a bullish vertical credit spreads and a bearish vertical credit spreads on the same underlying stock or index. A trader therefore is able to get 2 credits to his account and place just one margin on one side of the trade.

IRON CONDOR trade makes money primarily via time decay of short strikes as the trade progresses. Since the investor is a option seller, time decay slowly works in his favor. This trade makes most money when the underlying stock or index remains between the short strikes and expiring worthless. Therefore IRON CONDOR is a neutral strategy and works best in sideways or neutral markets.

IRON CONDOR involves 2 credit spreads there are 2 break even points in the trades. As the stock or index stays between these points the trader collects the ” income” and generates revenues. Most professional traders, market makers and floor traders use this index credit spread option strategy to generate consistent monthly income via income portfolios.

The delta of the trade is usually very small or negligent. But that does not mean if the underlying starts moving our trade  will stay delta neutral, since adjustments may become necessary. Typically an IRON CONDOR is constructed with at least one Standard deviation away from price of the underlying asset. That gives significant probabilities for the trade to be successful. Before getting into new positions, you should look for positions that have an extremely high percentage of profitability, something in the range of  90% or better.

Here is an example of  IRON CONDOR trade placed on NDX index in the month of November.

NDX IRON CONDOR TRADE

Lets say today NDX – NASDAQ 100 Index is trading at 1700 and we have the following:

SELL NOVEMBER 1975 CALLS
BUY NOVEMBER  2000 CALLS    Net credit = $ 1.10

SELL NOVEMBER 1600 PUTS
BUY NOVEMBER  1575 PUTS      Net credit = $ 1.70 

                                                   Total credits = $ 2.80

the risk on the trade is the difference between the strikes which is 10 points -minus the credit taken of $2.80 which is equal to $7.20. What does that mean ? It means you stand to benefit and make $2.80 and stand to lose $7.20 in the worst case.  If there is a 90% probability  that price may not reach our short strikes 1975 on the call side and 1600 on the put side, and the trade will expire worthless and generating income for the trader.

The risk/ reward ratio in this trade is not what an investor is looking for but the high probability of success of the outcome. Nothing works better as a tool in income generation as this Index credit spread option trading strategy does. If the short strikes are farther out from the price lesser is the amount of risk and higher the probabilities of success.

After an IRON CONDOR is placed and the play is established, increasing implied volatility can hurt the trade.

IRON CONDORS are the most powerful Index option credit spread trading strategies. A vast array of IRON CONDOS are employed by a variety of traders and institutions, market makers and floor traders making handsome profits on a consistent basis.

             Index-spread-options-trading