Iron Condors are an options strategy that involves selling both a call and put with the same expiration date. The individual premiums are not necessarily equal, but one is always sold for more than the other.
The trade has several advantages over strategies such as buying or selling calls or puts outright. They have no directional bias when traded at the money, making them ideal for options traders who want to remain neutral on the underlying asset.
Another advantage of using Iron Condors is that they generate income via commissions because there are two trades instead of one (this can be an important factor when trading capital is limited). However, this comes at a cost; Iron Condors typically have broader profit and loss ranges than strategies such as Long Calls and Puts (hence the name ‘Iron Condor’).
Why should traders use Iron Condors?
Iron Condors have a high probability of profit
The least expensive options, in general, are the ones that have the longest time to expiry. Furthermore, these options will also tend to be the ones that trade for less; this is because they generate less income (being further from the money). Iron Condor traders benefit from this because the long-dated options within their strategy will usually cost less than short-dated options and therefore provide lower risk exposure to account holders.
Iron Condors allow traders to make higher profits at a limited risk
Instead of selling one option at a shorter-term and another at a longer-term, an Iron Condor trader will sell both contracts with matched time frames. It can be advantageous because there is no time decay in the contracts, and they will likely both be trading for a similar amount. Furthermore, when markets standstill, it is easier to be profitable because there is little movement in the price of either asset. So both options trade for similar amounts and expire worthless.
Iron Condors can allow traders to trade options in Dubai
Iron Condors are usually traded at the money, which means they have no directional bias. You could benefit from this because it allows for increased flexibility concerning strike selection and account currency. Iron condors do not need to change as often as other options because no underlying movement demands a change. However, this does not impede their profitability, and they can remain viable options trading tools (provided market conditions don’t change).
Tips on using Iron Condors when trading with options
Use them to reduce the risk
You could reduce the risk of running an Iron Condor by trading them beyond the money. It will increase the premium received from each trade, but it will also raise breakeven levels and decrease the probability of that option expiring in the money.
Know before you go
It can be challenging to predict how volatile a market will be because it depends on unpredictable factors such as human nature and world events. However, by using volatility tools, traders may have more success in determining the probability of their trade being profitable. Furthermore, it could even highlight trends that indicate when an option spread might yield more significant profits than usual.
Drawbacks of using Iron Condors
The risk is high
Iron Condors are typically traded at the money, which means they have no directional bias. It can be an advantage because they generate income via commissions and wide profit ranges. Still, it also means that losses will exponentially increase when moving beyond this point (increasing margin call risk).
The costs are greater
There is an initial cost involved with opening any options account, but you can reduce standard fees by choosing a certain broker over others. The commission cost is also associated with each transaction (which is the same regardless of the trader’s choice). However, once these costs are considered, you will see that Iron condors generate more significant profits than most other options strategies.
The payouts are lower
Iron condors eventually expire worthlessly, so they yield no cash value. It can be advantageous because traders do not need to worry about reinvesting capital. Still, it also means that you may not achieve any additional income by waiting for the position to close. Furthermore, if a trader holds out for more than expected, they will miss out on other opportunities and, therefore, potentially lose other profits.