What is an Iron Condor?

Published at Mar 3, 2017, in Features

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.

S3 Consortium Pty Ltd (CAR No.433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information only. Any advice is general advice only. Neither your personal objectives, financial situation nor needs have been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice.

Conflict of Interest Notice

S3 Consortium Pty Ltd does and seeks to do business with companies featured in its articles. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this article. Investors should consider this article as only a single factor in making any investment decision. The publishers of this article also wish to disclose that they may hold this stock in their portfolios and that any decision to purchase this stock should be done so after the purchaser has made their own inquires as to the validity of any information in this article.

Publishers Notice

The information contained in this article is current at the finalised date. The information contained in this article is based on sources reasonably considered to be reliable by S3 Consortium Pty Ltd, and available in the public domain. No “insider information” is ever sourced, disclosed or used by S3 Consortium.