The Iron Condor Trading Strategy
If I Believe a Stock will Trade in a Range, The Iron Condor is the Strategy I Use
Let's address a very important factor, if you are unable to Stock Pick then you will not be successful at trading.
The first part of all of my strategies involves choosing low-beta (stocks that don't move violently), blue chip companies. This is extremely important because you can be blown out of the water by choosing high volatility stocks. My stock picking methodology is proprietary.
What is a Iron Condor? The Iron Condor is a neutral options trading strategy that involves selling both a call option and a put option at the same time, while also buying a call option and a put option at different strike prices.
The goal of the trade is to generate income through the premiums received from selling the options, while limiting the potential losses by holding both long and short positions.
The trade can be profitable if the price of the underlying asset stays within a defined range, but will suffer losses if the asset price moves too far in either direction.
To demonstrate the strategy let's take a look at one of Wall Street's darling stocks, Apple (AAPL).
Apple is the world's largest company and as such it is highly liquid, it doesn't move around violently, very stable and pays out nice option premiums, it is the perfect date to bring to the ball.
Let's take a look at the chart, Apple has had a big move off the lows and is now sitting in a range. We can create a nice Iron Condor up the highs near $180 and down to the lows near $120.
We want to place an iron condor trade in the Apple going out roughly 40 days with the intent of taking the spread off with roughly 20-30 days left until expiration.
We can create a large range with a nice probability of success. If AAPL stays within our 40-point range of 130-170 we will make 22.0% on the trade.
Let's take a look at the Option Chain, targeting the $130 strike price on the Puts side up to the $170 strike price on the Calls side will give us the highest probability of success.
Here is the trade:
The following are options with 40 days left until expiration.
Simultaneously:
Sell to open the AAPL March 2023 170 calls
Buy to open the AAPL March 2023 175 calls
Sell to open the AAPL March 2023 130 puts
Buy to open the AAPL March 2023 125 puts for roughly $0.69
Below is the Trade Ticket for how the trade lays out, and yes you have to know how to read a trade ticket, don't worry it is easy.
Do not accept less than $0.67 credit to enter this trade. Enter this trade as a spread to avoid paying double commissions.
The goal of selling the AAPL iron condor (credit) spread is to have the underlying stock, in this case AAPL stay between the 130 and 170 strikes through March expiration in 40 days.
Let's do the math:
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The probability of success is 86.10% based on our strike prices and the delta. (I love those odds, I will take this trade every time)
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Max return on the trade is the credit of $0.69 per share (100 shares in a contract) or 22% based on the required margin.
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If you only purchase 1 contract you would make $66.92 in income for that month. We generally sell 2000 contracts at a time which means $133,840 in monthly income for our members.
First part of our Income Cycle strategy is Selling Puts for Income on a monthly basis.
Second part of our strategy is Covered Calls. We are always long and we are always covered. Find out more about this strategy.
Credit and Debit Spreads option trades is another tool we utilize in certain market conditions. Used very sporadically, but quite powerful.