Iron condors are a favourite strategy that many traders use to generate significant income from the markets.
Iron condors have been famous ever since an analyst first introduced them at Goldman Sachs, Stephen Cohen – but what is so good about them, and how can you benefit?
There are several benefits associated with trading iron condors, which will be highlighted in the following article. If you want to know which strategies would suit your needs best, then read on.
Table of Contents
An Iron Condor explained
The Iron Condor is an options strategy that you can use to generate income from the markets without exposing your capital.
It’s called an iron condor because it consists of a bullish put spread and bearish call spread, just like how an iron bridge is made up of two metals – hence the name “Iron Condor”.
It’s not easy to describe what kind of stocks or assets are suitable for trading Iron Condors, so We’ll go through this in more detail later on. Before we move any further, let’s give you some information about the risks of using this options strategy.
The Risks
It would be best to consider essential things before deciding whether to use Iron Condors as part of your options trading strategy.
The primary thing to note is that this strategy is for experienced traders carrying high risks.
You should expect to lose money when using this options trading strategy, and if you cannot withstand the losses, you should avoid using them at all costs.
The main risk associated with using Iron Condors is that multiple positions are involved, reflecting the impact of changes in volatility differently across each contract.
It can somewhat reduce this type of risk by choosing less volatile stocks, but it’s still something to remember before starting your trading journey – especially if you’re a new trader.
Another factor that affects whether or not somebody will consider Iron Condors as a good options strategy is their minimum account size. If you are expecting to start with minimal capital, then Iron Condors are not the best option for you because they require at least $3000 just to get started.
So what kind of assets can I trade?
People use many different kinds of assets when trading Iron Condors, but one helpful tip is choosing something with low volatility.
It makes complete sense because volatility affects the premiums associated with each position, which means that your profit margins will be a bit lower than usual.
Benefits
There are many benefits associated with using Iron Condors, but an Iron condor strategy should only be used when they fit in with your investment style. If you don’t find them interesting or attractive for whatever reason, then please do NOT use them.
The first benefit of using this options strategy is generating income from market moves. Thanks to Iron, if the consensus outlook on stock changes, their price will shift accordingly.
Condors, you’ll pick up a premium at both ends of the trade. It means that even if nothing happens in the long run, you could still make money just because people’s opinions keep changing.
The best selling point on using Iron Condors in British option trading was that my maximum loss with this strategy before expiration is four times lower than if we had used a standard credit spread.
Trading limits can be reached much quicker using this strategy.
However, even if the maximum loss is four times lower than a traditional credit spread, it still has to be accepted as an involved strategy with potentially harmful results.
As always, the risk of trading options on underlying stocks is substantial, and you should not trade with money you cannot afford to lose, so please do your research first before considering entering any trades.
Another benefit associated with trading Iron Condors is that you’re protected against black swans – rare events that sometimes happen and completely change everything.
For example, XYZ company has been doing well lately, but they get sued for 5 million dollars, so they quickly lose 50% of their value.
While this would be terrible news for most people holding shares, you could make a profit by collecting the spread with Iron Condors.
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