When trading options, it’s possible for an investor to use different trading strategies that can be more or less risky. One of the safer ways to trade options is by using Iron Condors.
An Iron Condor investment strategy calls for selling two call options and two put options simultaneously with the same expiration date on the same underlying asset but with different strike prices. These are referred to as “wings”.
The strike price of both puts should be below the current market price, while the strike of both calls should be above where they are currently trading. It will help ensure that if your prediction of where the asset will stay within a range is correct, you’ll make money off the difference in premiums on each option sold.
The profit or loss of Iron Condors is determined by the price of the asset’s movement within its range. The more volatile it becomes, the larger your profits can be. However, even if there is no movement (a “non-directional” bet), this still results in a profit because you made money off both premiums.
Why should you use Iron Condors when trading options?
It gives you a chance to trade two options for each direction
By doing this, you guarantee yourself the chance to make money as long as the price of your asset moves by more than one of your wing prices. It is an attractive strategy if you think that the asset’s movement will be volatile.
No need for complicated strategies
Iron Condors are flexible, and they will almost always work out how you want them to if done correctly, depending on what it is predicting the market movement. It makes it a lot easier to trade options rather than using complicated strategies where you often have to predict whether it’ll go up or down, in addition to correctly checking which direction. Iron Condors don’t require that level of prediction and can be adjusted too if needed.
Always make money even without direction
With Iron Condors, you’ll always make money if the asset price doesn’t move past either of your wing prices. Because most people don’t know how volatile an asset will be, this is an excellent strategy to have up your sleeve because you’re guaranteed not to lose any money.
How to use Iron Condors with options
Decide how much you want to risk
Make sure the amount you’re willing to risk is reasonable. The more money you’re willing to lose, the fewer premiums you’ll need to sell. If it’s too high, your investment won’t be profitable even if the price goes up by what you predicted because of the premiums that you required. Make sure it’s not too low either because then there’s nothing guaranteeing that your prediction of where the asset will go will be correct.
Use an options calculator
Use an options calculator that can tell you precisely how many options to use for each wing and show you exactly how much they cost under different conditions. This way, you know what kind of premiums are needed so that no matter what happens, you make money off the difference.
Put your investment strategy to the test
Start with as little money as possible and see if it works as expected before investing more significant amounts. This way, you’ll know there’s a chance that setting a sell for this option isn’t going to work out so well or that you might have made a mistake somewhere along the way, which is why it doesn’t always show up on your options calculator. Doing this will also help give you confidence before engaging in more significant deals because you know exactly what works and what doesn’t.
Have patience
Iron Condors rely on the asset’s price staying within a specific range and not going past either wing before expiration. Because of this, you should wait until expiration to see what happens because it’s usually better than predicting volatility at the current moment. If there is no movement, wait for enough time for price movements to even out and continue as usual if the prediction is correct.
If you need someone to help you with this strategy, consider looking at Saxo broker Dubai.
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