Iron Condor Options Strategy (TUTORIAL + Trade Examples)

the iron Condor option strategy is extremely popular among traders because the iron Condor can be market neutral meaning that you do not have to pick a specific stock price movement in order for your position to profit the iron Condor is a limited risk strategy meaning that you know a hundred percent of your risk before you put the trade on when selling iron condors you can make money just from the passage of time as long as the stock price remains within a specified range of your choosing the iron Condor can also be adjusted to reduce the loss potential should the trade move against you in this video I'm going to show you exactly how the iron Condor strategy works we're gonna walk through numerous trade examples so that you can see exactly how the strategy has performed historically in various scenarios and I'm also going to show you how to setup the iron Condor position using real brokerage software so be sure to stay tuned be sure to check out the link in the description as I've created a free iron Condor PDF that will help you choose expiration cycles and walk you through common ways to choose strike prices when setting up iron Condor trades if you're new to the channel be sure to subscribe and turn on notifications so you can get all of our options trading videos in the future let's start by talking about the characteristics of selling iron condors which is typically referred to as a short iron Condor position the short iron Condor strategy can be interpreted as the combination of selling a put spread and selling a call spread when you sell a call spread that is a bearish trade meaning that the strategy profits when the stock price remains below the call spread and when you sell a put spread that is a bullish trade meaning that the strategy profits when the stock price remains above the put spreads the combination of a short put spread and short call spread into an iron Condor gives you a market neutral trade meaning that you want the stock price to remain in between the two spreads as time passes as opposed to moving significantly in one direction here's a quick example trade from historical option data that demonstrates how a short iron Condor profits when the stock price remains in-between the call spread and put spread as we can see the stock price remains in-between the call spread and the put spread as time passes and that leads to steady profits for the iron Condor seller we're gonna go over a lot more trade examples and just a bit but before we do we have to talk more about how the short iron Condor strategy works and how it is constructed to get started let's take a look at a hypothetical short iron condor position and look at the expiration profit and loss graph as well as the maximum profit potential the maximum loss potential and the break-even prices for the trade in this example the stock price is at $500 at the time of entry and the options that we're going to use have 60 days until expiration to create this iron Condor position I'm going to sell the 550 call option and purchase the 600 call option to create a 550 600 short call spread and I'm going to sell the 450 put option and purchase the 400 put option to create the 450 400 short foot spread in this example I sell the 450 foot for six dollars and 15 cents in option premium and I buy the 400 foot for 72 cents in option premium for selling the 550 call I collect seven dollars and 89 cents and for buying the 600 call I pay one dollar and 94 cents so the total option premium collected for selling the 450 foot and the 550 call comes out to 14 dollars in four cents the total premium paid for buying the 400 foot and the 600 call comes out to two dollars and 66 cents since I collected 14 dollars and four cents for the short options and paid two dollars and 66 cents for the long options the net premium collected is 11 dollars and 38 cents when trading options when you collect more option premium than what you pay out the trade is said to be entered for a credit in this example the iron Condor is entered for an $11 and $0.38 credit let's take a look at the expiration profit and loss graph for this particular iron Condor position in this example we can see that the maximum profit potential for this iron Condor position is 1138 dollars and the maximum loss potential is significantly higher at 3862 dollars the break-even prices for this trade are four hundred and thirty eight dollars and sixty-two cents and five hundred and sixty one dollars and thirty eight but where do these numbers come from well the maximum profit potential of 1138 dollars comes from the fact that we collected eleven dollars and 38 cents for selling the iron Condor and the best-case scenario is that the iron condors options expire worthless which means the iron condors value overall is zero dollars at expiration if I sell an iron Condor for $11 and 38 cents and the iron condors value is zero dollars at expiration my profit on that trade will be eleven dollars and 38 cents on the iron Condor but due to the option contract multiplier of 111 dollar and 38 cent profit on the option translates to a profit of 1138 dollars the maximum lost potential of 3862 dollars comes from the fact that both of these iron Condor spreads are fifty dollars wide meaning that the width of the put spread is fifty dollars wide and the width of the call spread is fifty dollars wide and at expiration only one of these spreads can be in the money while the other spread will expire worthless if one of these spreads is fully in the money at expiration then that spread will be worth fifty dollars and the opposite spread in the iron Condor will be worthless which means the iron condors value at expiration will be fifty dollars which represents five thousand dollars of value if I sell an iron Condor for eleven dollars and 38 cents and the price increases to $50 that would represent a loss of thirty-eight dot sixty two cents which in actual dollar terms represents a loss of three thousand eight hundred and sixty two dollars while the difference in the maximum profit potential and the maximum loss potential might seem scary keep in mind that the maximum profit of one thousand one hundred and thirty-eight dollars will occur if the stock price is anywhere between 450 and 550 dollars at expiration which means with the stock price at five hundred dollars at the time of entry the stock price can increase or decrease up to ten percent and the strategy will still make the full profit potential at expiration the only way this iron Condor trade losses three thousand eight hundred and $62.00 is if the stock price is either below $400 or above $600 at expiration in 60 days with the stock price at $500 at the time of entering this position that means the stock price either has to fall more than 20% or increase more than 20% over the next 60 days for that maximum loss potential to be realized at expiration in terms of the breakeven prices the lower breakeven price is four hundred and thirty eight dollars and sixty-two cents and that's because at four hundred and thirty eight dollars and sixty-two cents the short 450-foot will have eleven dollars and thirty eight cents of intrinsic value at expiration while all of the other iron condors options will expire worthless and therefore the iron condors value at expiration will be eleven dollars and 38 cents which is the same price that we sold the iron Condor for at the time of entering the trade and therefore no profits and no losses will be realized at expiration the upper break-even price of 561 dollars and 38 cents comes from the fact that at that price the 550 call option will have 11 dollars and 38 cents of intrinsic value at expiration while all of the other iron condors options will expire worthless because of that the iron condors overall value at expiration will be eleven dollars and 38 cents which is the same exact price that we sold it for at the time of entering the trade and because of that no profits or losses will be realized on the trade now as you might have guessed because of the fact that the stock price can be anywhere between 438 62 and 560 138 at expiration and the trade will make money selling iron condors is a very high probability trading strategy meaning that when you sell an iron Condor you have a greater than 50% probability of making money in theory now that we've looked at a hypothetical trade example let's go look at some real iron Condor trade examples using historical option data and look at how those trades performed based on the stock price movements over time as I mentioned earlier there's a link in the description where you can download a free iron Condor pdf that I created that'll show you common ways to set up an iron or trade in terms of choosing an expiration cycle and selecting strike prices in this first iron Condor trade example we're gonna look at a scenario where the iron Condor earns the maximum profit potential which occurs when the stock price is in between the call spread and the put spread at expiration let's take a look at the trade details at the time of entering this trade the stock price was trading for five hundred and seventy four dollars and eighty one cents the options used in this example have 46 days to expiration at the time of entering the iron Condor to begin constructing this iron Condor position I sold the 535 put option for $11.75 and I sold the 615 call option for $10.40 to complete the iron Condor I bought the 505 put option for six dollars and three cents and I bought the 645 call option for four dollars and 47 cents in this example the net credit is $11.65 which comes from the fact that I collected twenty two dollars and fifteen cents for the options that I sold but I paid ten dollars and fifty cents for the options that I purchased $22.15 - ten dollars and fifty cents gives us a net credit of $11.65 for this iron Condor trait because of that the maximum profit potential for this trade is one thousand one hundred and sixty-five dollars the maximum loss potential of this particular position is 1835 dollars and that comes from the fact that both spreads in this example are thirty dollars wide meaning the call spread is thirty dollars wide and the put spread is thirty dollars wide and since I collected $11.65 for this iron Condor position the maximum spread width of 30 dollars less the eleven dollar and sixty five cent credit received comes out to a maximum loss potential of eighteen dollars and thirty-five cents and when we multiply it by 100 which is the option contract multiplier we get a maximum loss potential of 1835 dollars the expiration break-even prices are 523 dollars and 35 cents and six hundred and twenty six dollars and sixty five cents let's take a look at how this trade for formed on the very top of the chart we're looking at the changes in the stock price relative to the options that were used in the iron Condor as well as the break-even prices for this particular position on the bottom of the chart we're looking at the price change of the iron Condor position as the stock price changes values over time in the first few weeks of the trade we can see that the stock price fell from just about five hundred and seventy dollars to just below four hundred and eighty five dollars at which point the 535 505 puts bread was entirely in the money with a significant decrease in the stock price and the short put spread fully in the money the iron condors value appreciated to twenty two dollars which represents a loss of just over one thousand dollars on the iron Condor position at that moment fortunately the stock price recovered over the coming weeks and ended up in between the cost bread and the puts bread for the remainder of the trade as we can see the iron condors steadily lost value due to time decay because all of the options consisted of 100% extrinsic value when the stock price was in between the call spread and the put spread the steady decay of the iron condors value generated profits for the iron Condor seller because when you sell an iron Condor the goal is to eventually buy back the iron Condor at a later date for a price that is less than what you initially collected for the iron Condor or as it happened in this example the best-case scenario is that the stock price is in between the cost brand and the puts bread at expiration in which case the iron Condor seller keeps 100% of the premium that they collected at the time of selling the iron Condor with an initial sale price of $11.65 the iron Condor seller in this example would have profited by one thousand one hundred and sixty five dollars per iron Condor that they sold to summarize this trade a significant stock price decrease early on in the trade caused some initial losses but fortunately the stock price did recover and was in between the cost read and put spread at expiration which resulted in the maximum profit potential for this iron Condor position in this example we're going to look at a scenario where the iron Condor ends up with the maximum loss potential at expert the initial stock race is a hundred and twenty one dollars and forty-five cents and to construct the iron Condor we're going to look at options with 46 days to expiration to start off the iron Condor I sold the 119 put option for one dollar and 25 cents and sold the 124 call option for one dollar and five cents to complete the iron Condor I purchased the 115 put option for 39 cents and bought the 128 call option for 38 cents the net credit in this example is one dollar and 53 cents which stems from the fact that I collected two dollars and 30 cents for the options that I sold but I paid 77 cents for the options that I purchased the maximum profit potential in this case is 153 dollars the maximum loss potential in this case is two hundred and forty seven dollars which comes from the fact that both spreads are four dollars wide and with a net credit of one dollar and 53 cents the most the iron condors value can move against me is two dollars and 47 cents which comes from the four dollar spread width minus the one dollar and fifty three cent credit which comes out to two dollars and forty-seven cents that the iron Condor can move against me and when we multiply that by 100 we get a maximum loss potential of two hundred and forty seven dollars the expiration break-even prices in this example are 117 43 and 125 53 let's take a look at what goes wrong with this trade in this example what goes wrong is very clear since selling iron condors is a market neutral strategy that profits when the stock price remains in between the call spread and the put spread as time passes if the stock price moves through the call spread or through the put spread and one of the spreads is fully in the money at expiration the iron Condor will end up with the maximum loss potential at expiration in this example the stock price heads higher over the entire duration of the trade and at expiration the stock price is well above the call spread strike prices of 124 and 128 in which case the 124 128 call spread is entirely in the money and because of that the put spread expires worthless but the call spread expires with a value of four dollars and that means that the iron condors value as a whole expires with a value four dollars with an initial sale price of one dollar and 53 cents an increase in the iron condors value to four dollars represents a two hundred and forty seven dollar loss per iron condor that was sold now that we've looked at profitable and unprofitable iron Condor trades what is setting up an iron Condor look like when using real brokerage software in this example I'm going to use the Tastee where it's brokerage platform and I'm going to show you exactly how to set up a real iron Condor position and I'm even gonna route the trade for you and show you what it looks like once that trade is filled so I've just opened up the Tastee where it's trading platform and I'm currently on the chart page for FedEx which is the ticker symbol FDX now I'm going to create a iron Condor position in this stock and to do that we have to go to the trade page and to do that just click on this trade tab right here and this will open up all the option expiration cycles for FedEx so as we can see here we have a number of different choices and for this example I'm gonna use the June 21st 2019 expiration cycle which has 37 days to expiration and the reason I'm going to choose this expiration cycle is first it has between 30 to 60 days to expiration which is my preferred timeframe for selling iron condors and also this purple e with the line across this is telling me that FedEx has earnings somewhere between June and the July expiration so by trading in the June expiration cycle I will not be impacted by this earnings announcement so I'm gonna go ahead and click into the June 2019 expiration cycle and on the left hand side we have the call options the right hand side we have to put options and in the middle we have the strike prices for this example I'm going to start by selling the call and the put options with the Delta around 0.16 now if you download the free PDF file that I've discussed earlier with the link in the description we'll talk more about the trade setup process but for now I'm gonna go ahead and locate the options with the deltas closest to 0.16 this 185 call option is the starting point so to start the iron Condor I have to sell this option and to do that I'm going to click on the bid price which queues up in order to sell the 185 call and then I'm going to go to the put side and do the same exact thing so we can see the 155-foot option has a delta of negative 0.16 so I'm going to go ahead and click on the bid price for that to complete the iron Condor we have to purchase a put option at a lower strike price and I'm just going to do five dollar wide spreads on each side which means I'm gonna buy the 150 put and buy the 190 call option this is the completed iron Condor and for this trade we can see that the credit is at one dollar and ten cents and right here we see the maximum profit says 110 dollars and the maximum loss potential says 389 dollars and that's because the price had just changed so let's go ahead and visualize the risk and reward potential of this trade and the way I can do that is by clicking on the curve button at the top here making sure analysis is checked and here we can see the risk and reward profile of this particular iron Condor position if FedEx is between 155 and 185 at expiration the profit on this position will be a hundred and eleven dollars and that comes from the fact that if I collect one dollar and eleven cents for this iron Condor and all the options expire worthless I will make one dollar and eleven cents on the iron Condor which in actual profitability terms comes out to 110 or 111 dollars as the price is changing right now on the other hand if FedEx is below 150 or above 190 at expiration the maximum loss potential of three hundred and ninety dollars will be realized because if FedEx is above one ninety at expiration these put options will expire worthless but this 185 190 call spread will be worth five dollars and if FedEx is below 150 at expiration then the call spread will expire worthless but the 155 150 put spread will be worth five dollars and in either of those scenarios the iron condors value will be worth $5 at expiration and if I sold the iron Condor for one dollar and 10 cents then an increase to five dollars will represent a three dollar and 90 cent move against me which comes out to a maximum loss potential of three hundred and ninety dollars so let's say I wanted to actually go ahead and put this trade on all I'd have to do is make sure my price is selected and right now it says the mid price is one ten cents so I'm gonna go ahead and click this lock button so that Christ does not change as I go to click review and send and then once I click review and send this will confirm all of my order details for me it'll tell me my Commission's and estimated fees as well as my buying power reduction which is basically the maximum loss potential plus the fees so I'm going to go ahead and send this order and see what happens if I go to the positions tab we can see that FedEx has a working order and it's telling me that the mid price of this iron Condor position is one dollar and twelve cents but my limit order is at one dollar and ten cents you might think that this trade should be getting full right now since the mid price is higher than what I'm trying to sell it for but this is just a quote and not necessarily where the options are actually trading this is just taking out the mid price of all the options and telling me what that mid price is so I'm not getting filled so one thing I can do is right-click on this click replace order and then I'm just going to reduce the amount I'm trying to collect for this by one penny and then I'm gonna click review and send again send order and see what happens and I will do that one more time just so I can see if I can get filled and I'll do that oh there we go so I just got filled on that FedEx iron Condor and as we can see here now it is a live position in my portfolio and we can track the P&L it'll tell me how many days the position has been opened and all this other information displayed on the portfolio page right here I'm gonna go ahead and just close this right away because this is not a position I want so to do that I'm just gonna click on all four of the legs right click hit closed position and this brings up in order to close the position at whatever the current mid price is and since it's at one dollar and ten cents I'll review and send send order and hopefully get out of this position now I'm just going to go ahead and get out of this position pretty aggressively because this is not something I want to hold and there we go so I'm out of this FedEx iron Condor and as you can see you can get in and out of option positions just that quickly that was literally less than 60 seconds that elapsed so hopefully this little tutorial was helpful in showing you how to set up and trade an iron Condor using real brokerage software I hope those tips were helpful and that you have a better idea of how to go about setting up your own iron Condor positions on whatever brokerage platform you're using next I'm going to quickly discuss buying iron condors as a trading strategy completely opposite of selling iron condors buying iron condors is typically referred to as a long iron Condor position and a long iron Condor position consists of buying a call spread and buying a put spread at the exact same time and in the same expiration cycle since buying a call spread is a bullish strategy which means it makes money when the stock price increases through the call spread strike prices and buying a put spread is a bearish strategy meaning that the put spread profits when the stock price falls below the put spread strike prices buying a call spread and buying a put spread at the same time to construct a long iron Condor position is technically still a market neutral position when buying iron condors a trader is making the assumption that the stock price is going to increase or decrease significantly in a short period of time but the trader does not necessarily make a prediction about which direction the stock price will actually go looking back at our earlier example if we have a stock price at five hundred dollars and we purchased the 550 600 call spread and the 450 400 foot spread for a total debit of 11 dollars and 38 cents our maximum loss potential will be one thousand one hundred and thirty-eight dollars if the stock price stays between the call spread and put spread through expiration however if the stock price is above six hundred dollars at expiration or below four hundred dollars at expiration the call spread or the put spread will be fully in the money in which case the iron condors value will be five thousand dollars since one of those spreads will be worth fifty dollars while the other spread will expire worthless and if the iron condors value increases to fifty dollars from a purchase price of eleven dollars and 38 cents the profit on that trade would be three thousand eight hundred and sixty two dollars while it may seem more attractive to you to have a 1138 dollar maximum loss potential and a 3862 dollar maximum profit potential keep in mind that the stock price has to increase or decrease more than twenty percent for that maximum profit potential to be realized and if the stock price does not move more than ten percent in either direction the strategy will lose 1138 dollars due to the fact that you need a significant movement in either direction to make money when buying an iron Condor buying iron condors is a low probability trading strategy meaning that if you buy an iron Condor there is theoretically less than a 50% probability that you will make money on that trade if the stock price does not make a significant movement in either direction before the options expire the iron Condor purchase will lose money to time decay that's it for this video everybody I really hope you enjoyed this video on iron condors and I hope you feel more comfortable with this extremely popular options trading strategy be sure to check the links in the description for that free iron Condor PDF and also to learn about how you can get one of our paid courses for free when you open and fund your first taystee works brokerage account I'm Chris from project option and I will see you video [Music]

Channel: projectfinance

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Keywords: iron condor, iron condor options strategy, iron condor options, iron condor explained, selling iron condors, short iron condor, long iron condor, buying iron condors, options trading, options trading strategy, option strategies, stock market, iron condor option strategy, iron condor example, iron condor trade examples, projectoption, iron condor tastyworks, options strategies, neutral options strategies, options trading for beginners, option trading strategies

Id: 6UOk_78nVio

Length: 25min 56sec (1556 seconds)

Published: Sat May 18 2019