An iron condor is an options strategy with very distinct characteristics. It contains two puts (a long and a short) and two calls (likewise). They each have their own strike price, but they share an expiration date. The strategy has a similar outcome as a standard condor spread. However, it utilizes calls and puts rather than one or the other.
It’s certainly an advanced strategy. But we aim to make it easier to understand in the following sections.
What Is The Iron Condor Strategy?
The iron condor is considered a “directionally neutral, defined risk strategy.” It allows you to get broad exposure to stock without forcing yourself to establish a directional position. The eventual aim is to take advantage of time and any decreased implied volatility to earn a profit.
So, let’s take a closer look at how the strategy works.
How Does The Iron Condor Strategy Work?
In a few words, the short and long puts and calls hedge each other while using their shared expiration date to benefit. It works like a strangle:
- You sell the short put and short call spread simultaneously.
- Your position profits at the expiration date, with the risk or reward calculated upon position entry.
- You want the options to be worthless upon expiration. Therefore, you’re betting against the underlying trading moving beyond either spread by the end.
- Since the four options have different strike prices, an iron condor is a defined risk strangle.
Iron Condor Profit and Loss
Traders like the iron condor for its limited maximum loss. It’s capped thanks to the wings (i.e., the high and low strike options). However, it’s worth noting that does mean profits are restricted too.
The Bottom Line
If you’ve been trading for a while, utilizing the iron condor may be the portfolio-boosting strategy you’ve been searching for. If not, we recommend using Tiblio to effortlessly seek out the best investment strategies for you.