Options Trading Strategy: Iron Condor

Getting risk-free passive income from the stock market is an investor’s dream. Unfortunately, nothing in the stock market is risk-free. However, if you are willing to have a limit on the downside in exchange for a limit on the upside, there is a multi-leg options strategy worth considering called Iron Condor. This strategy can be applied to stocks with options in any stock sector.

This strategy requires basic options and knowledge of spreads. The Iron Condor is a multi-leg options strategy that uses credit spreads at the top and bottom of a trading range. It works best in a sideways or low volatility market.

Market-neutral strategy

An Iron Condor is a market-neutral rather than directional options strategy. This means you don’t need to choose a direction to make revenue; instead, you need to identify a trading range within which the stock will most likely remain. This involves using technical analysis and trying to identify patterns, trends and ranges. You also want to be sure not to trade Iron Condor during volatile events such as earnings reports as you want the shares to remain trading within a price range.

The mechanics of an iron condor

The strategy is called iron condor because the shape of the profit/loss chart looks like a large bird with wings, with the body representing maximum profit and the wings representing losses. An Iron Condor is generally made up of 2 out of the money (OTM) credit spreads. A credit spread involves 2 trades, selling an option and buying an option at different strike prices despite both having the same expiration. An Iron Condor is made up of 4 total exchanges.

Identify the trading range.

The first step is to identify a trading range. It can be in a daily, weekly or monthly trading range. A larger price range will require a larger time graph.

Let’s use Intel Co. NASDAQ: INTC on the daily candlestick chart. INTC trades at around $43.94 on February 21, 2023. INTC recently dropped its earnings report, causing it to hover in a trading range; It traded below the $45 level with 50-period daily moving average (MA) resistance at $45.76. This represents the gap between the resistance level and the 50-period daily moving average. We raise 33 cents.

The lower range level is around $42.00, with lower support around $41.05 before the swing low. The daily relative strength index (RSI) is stuck around the 50 band. Based on the charts, we can use the upper $45 range and the lower $42 range. We raise 29 cents. The total spread premiums we collect on the Iron Condor is 62 cents or $67.

Making trades

Using the $45 and $42 ranges, we can start to increase credit spreads on both sides.

For the upper $45 range, we can look for the $45/$46 call credit spread expiring in 23 days, March 15, 2024. Unlike debit spreads, where we have to buy the spread, credit spreads in in reality they pay us to place the operation. The $45/$46 credit spread pays us 33 cents. We sell the $45 call at $1.32 and buy the $46 call at 99 cents. The difference is the 33 cent spread, for which we get a credit.

For the lower $42 range, we can look for $42/$41 put credit spreads. We will sell the $42 put for 88 cents and buy the $41 put for 59 cents, which has a spread of 29 cents. After executing both credit spread trades, the Iron Condor strategy is executed. INTC would need to close within the $45 and $42 envelope to gain the maximum profit of 62 cents.

Possible results

Upon expiry, if INTC closes between $42 and $45then the the profit is 62 cents premium received from the two credit spreads. The $45/$46 call credit spread, which we received 33 cents, would expire worthless as INTC closed below $45. The put credit spread, which we received 29 cents, would expire worthless as INTC closed above $42.

SELF INTC closes above $46, we would keep the premium on the $42/$41 put credit spread at 29 cents. We would lose $1 on the $45/$46 call credit spread for a net loss of 71 cents.

SELF INTC closes below $41, we will keep the premium on the $45/$46 call credit spread at 33 cents. We lose $1 on the $42/$41 put credit spread for a net loss of 67 cents.

Manage the trade

If you are an experienced trader, you can monitor the iron condor and make changes or close the trade when it looks like one side of the envelope is ready to be punctured. The longer the underlying security remains inside the wrappers, the more profitable it can be thanks to Theta erosion.

Iron Condors can be actively managed as maximum losses can be higher than maximum profit. The maximum profit corresponds to the premiums received on credit spreads. Maximum losses cost the amount of the spread between strikes minus the premium received for the spread. We will delve deeper into trading spreads, including credit spreads, in future options articles.

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