Why I Love Iron Condors and You Should Too

I run into people all of the time that think the only way to make money in the stock market is to pick stocks while they’re still low and ride the wave of ups and downs until you make some money. What’s the age old mantra? “Buy low, sell high.” 

For the more experienced traders, we know that there are more ways than one to make money in the stock market. Sure, short-selling is a possibility, but I’m talking about options contracts.

What if I told you can not only make a lot of money trading options combinations, but that a stock could literally do nothing and you could make a ton of money off of it? Don’t believe me?

Allow me to introduce you to something called the Iron Condor.

The Iron Condor is an options combination four parts:

Buying and selling a call with different strike prices, and buying and selling a put with different strike prices.

The combination is really just putting two vertical spreads into a single trade that produces a risk diagram with a big spike in the middle. The goal is to identify stocks that are stuck in a holding pattern, with little price variation, and to aim to make that spike fall right where the stock price is going to be stuck at.

On the opposite side, it also produces a nice hedge to minimize losses.

The Iron Condor can be a bit risky, based on a stock’s volume, volatility, and probabilities. Oftentimes, the probability of a stock falling within a certain price can be less than 10%. The reward though can be 9x’s greater than the potential loss.

I think this sums up pretty well why I’m in love with Iron Condors.

For the trader looking for predictable steady income, you can setup high probability trades with a nice return. If you speculate that a stock is going to stay within a certain price range, i.e. do nothing, by a set date, you can sell an iron condor that makes you a nice chunk of change.

For the trader looking for low-probability, but high reward trades, you have a ton of possibilities. The key is finding an opportunity with enough volume and price action to provide favorable setups. If you think a stock is going to move, and want to get in with minimal up front costs, buying an iron condor setup can be very profitable.

So, how do you begin?

First, try to learn as much about Iron Condors as possible. Research other tools, and read as much as you can.

Second, if you having already started trading on the thinkorswim platform, sign up today. Get started using their analysis tools and find trade setups that fit your trading personality.

Lastly, practice, practice, practice. Performing iron condors is something I learned when I traded with a prop firm, and they made me spend at least three months just practicing. Get used to what will be filled and what won’t, and how to adjust your strategy if something bad happens (like the call you sold get’s exercised).

Please, please, please share your thoughts below. What has your experience been with trading options and futures?

Happy trading

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