What is an Iron Condor?
Published 03-MAR-2017 16:39 P.M.
2 minute read
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Most traders can potentially profit from markets that are either rising or falling. But what if the market is stagnating and going sidewards asks Karo Cornips?
When the market is stagnant, it is very hard to use other strategies to profit, and can be a wasteful tie-up of your capital. Instead, traders can use an Iron Condor, where you will make maximum profit if the stock remains between two particular levels. Bullish and bearish movement can occur, but only to a specific point, in order to make maximum profit.
However it should be noted that no trading strategy is a guarantee of success and investors should seek professional financial advice about their trading strategies before making an investment decision.
So when would we use an Iron Condor?
An Iron Condor is best used when there is very little movement in the market. The stock can continue to trade up and down, but provided it stays between two particular levels, you will still make maximum profit.
From a technical perspective, an Iron Condor is best used when a stock is trading between a strong level of resistance and support, forming a channel pattern. We can place all our risk both above the resistance level, and below the support level, which acts as protection for our trade. As long as the stock continues to trade in the channel between the resistance and support levels, we can make maximum profit. We can also use both these levels a technical stops; if the share price breaches them, we may close out part, or all of the trade.
Iron Condors can also be setup in a way where if the trade does what you want, and you make maximum profit, you will close out for zero fees and therefore half the cost of the trade.
The other reason traders like this strategy is it can be managed from afar. It doesn’t require too much attention, and is suitable for traders who perhaps work full time and don’t have the capacity to be actively trading day in day out.
Let’s run through an example.
The chart below is of the ASX 200 index (XJO). The XJO index is made up of the top 200 stocks by market capitalisation. It is an index on the Australian market we can trade options on.
The XJO seems to be trading between to very strong levels: a resistance level at 5825, and a support level at 5600. You can see each of these levels have been tested at least twice, and have held to form a broader channel pattern. The XJO is currently trading in the middle of the range. It seems that it is likely to continue lower, back down to support but, rather than trade directionally, we can enter an Iron Condor where we place all our risk above the 5825 resistance level, and below the 5625 support level. As long as the XJO remains between these two levels, we will make maximum profit and exit for zero fees.
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