Today options trading has become a popular trading form in the stock market. In earlier times, options trading was perceived as a risk-prone investment. However, with the emerging options strategies and advanced technical analysis, traders can now profit significantly from options. Today we have many fundamental and technical analysis methods/strategies that increase the profitability of options trading.
And iron condor is one among them. Iron condor options strategy is quite popular among traders. Also, many options trading apps include iron condor strategy for trades. So, if you are an options trader or are curious about iron condor trading strategy, continue reading. Here we will discuss all the essential details about the iron condor options strategy.
What is An Iron Condor?
The iron condor is a type of options trading strategy that helps traders gain stable returns from their investments. Also, if you are interested to know about how to create options trading strategies with iron condor, you must know about what it is.
The iron condor is an options trading strategy that comprises two puts, two calls, and four strike prices, all with the same expiration date. The iron condor options strategy secures maximum profit when the underlying asset closes the medium price strike at expiration.
Due to the neutral nature of the iron condor strategy, traders can minimize the upside and downside risks in options trading. However, the strategy also limits the potential profit with restricted risks.
Iron Condor: A Breakdown of The Strategy
As far as we have learned that iron condor is an options trading strategy that consists of two puts, two calls, and four strike prices with the same expiration date. However, knowing the definition may not be sufficient to apply iron condor in options trading.
So, before you use iron condor to invest in options with Algo trading apps, know the strategy breakdown. The iron condor is a directionally neutral strategy with defined risks that reduce risks by putting two puts, two calls, and four strike prices with the same expiry.
Iron condor has limited upside and downside risks due to the low side options price, which limits the risk and protects against any significant loss. But these strike wings also limit the potential gain from the options. A trader can gain their desired profit when all the options end worthless, and the strike price reaches the middle of the strike price. And if the trader gets their desired results, they will have to pay a fee to close the deal.
Here is the breakdown of the strategy that you can utilize in your opinions trading builder app –
Sell one OTM (out-of-money) or ATM (at-the-money) put with a strike price close to the underlying asset’s price.
Buy one OTM (out-of-money) put with a strike price lower than the underlying asset's price. It will help to prevent significant downside risks of the options trade.
Buy one out-of-money call option with a strike price above the underlying asset's price, as it will help to prevent any significant upside risks of the trade.
Sell one ATM or OTM call strike above the underlying asset’s current price.
As it chooses different strike prices, iron condor makes it possible to build your options trading strategy lean bearish or bullish. For instance, when you use iron condor in your options trading app with both the middle strike prices being higher than the underlying asset's current price, you expect a minimal rise by the expiration. And either way, if your strategy fails or succeeds, the trade will carry a limited reward and limited risk.
Benefits of Using an Iron Condor Trading Strategy
Options traders often adapt iron condor while trading with an options trading app or Algo trading app as it is a limited risk strategy. Also, this trading strategy limits the potential gain and offers relatively stable returns. However, the Iron condor options strategy has multiple benefits that attract many options traders. And below, we will discuss some of the popular ones-
Knowledge About Maximum Profit and Loss
The essential benefit of using iron condor in your options trading is learning about the maximum possible profit and loss of the trade before making a move. When you implement iron condor in your opinions strategy builder app, you get the analysis of how much you can lose or gain if the underlying asset’s current price moves up or down.
Low-Profit Low-Risk Strategy
The iron condor is a directionally neutral strategy with a defined risk. Therefore when you use this options trading strategy, you make the most of the low-volatility market situation and earn a profitable position from it.
Adjust or Limit Strategy To Prevent Loss
Another vital advantage of an iron condor is it is easily adjustable. You can limit or adjust the strategy in your options trading app to avoid any loss-making position in the tread. When you can modify or limit your strategy, you can easily reduce any significant loss and gain a limited profit from the trade.
Short Iron Condor
The short iron condor is a subtype of the iron condor options strategy. In the short iron condor, all the put and call options are short, put spreads are bullish, and call spreads are bearish. A short iron condor always consists of a call’s strike price higher than the put's strike price with the same expiration date.
Long Iron Condor
The long iron condor is also a subtype of an iron condor. And similar to the short iron condor, it also consists of four options and price strikes. But unlike the put spreads of long iron condor is bearish, and the call spreads are bullish. In a long iron condor strategy, a trader sells a lower strike put and buys a lower-middle strike put. Also, they purchase a higher-middle call strike and sell a higher call strike.
Short Iron Condor vs Long Iron Condor
Short and long iron condors are helpful iron condor strategies and are quite popular among options traders. And if you want to use the iron condor trading strategy in your options strategy builder app or options trading app, you must learn about the fundamental differences between the long and short iron condor.
In a short iron condor strategy, investors buy two outer strike options and sell two inner strike options. On the other hand, the long iron condor strategy goes the polar opposite, buying two inner strike options and selling two outer strike options. The short iron condor is constructed to gain profit from a significant price movement or implied volatility.
While the long iron is also built in a similar method as the short iron condor, the primary difference is that the long iron condor has a short outer strike and a long inner strike position, unlike the short iron condor, where the construction is the exact opposite.
The iron condor is one of the popular options trading strategies that almost every options trader wishes to implement. However, it requires in-depth knowledge and understanding of price strikes and options, and only a few expert traders can successfully use iron condor. And here, we have discussed all the essential details of the iron condor strategy to help you use the iron condor in your opinions strategy builder app or Algo trading app and gain profit with limited risk.
Also, if you want to know more about how to create options trading strategies, you can ask professional options trading strategy builders to guide you in your options trading and make the most of your investments.