Our last blog covered a Debit Strategy called Diagonal Spreads, which Chris Burgess taught in his Options Accelerator class, and you can read here if you wish. Today, we will take a look at the other side of the coin; the options credit strategy called the Iron Condor.
As we covered last time, a debit strategy or a debit spread is when a trader simultaneously purchases an option they expect to move up or be bullish in the near future. They sell an option from the same class of security with a different strike price. In essence, they are playing both sides of the trade in an effort to minimize their risk. The same can be said of an options credit strategy because you are entering a trade by purchasing one option and then selling a second option that is in the same class with different strike prices. Again, you are playing both sides of the trade in an effort to minimize your risk. Let’s take a look at page 35, the Iron Condor, from Chris’ Ultimate Options Strategy Encyclopedia as an example of a credit strategy.
The first part of the page is the bullet points of the Iron Condor, which lists it as a credit strategy. Next, it shows how many legs the trade has, which in this case is four and whether you can use either calls or puts when deploying this method. Finally, its overall usefulness which Chris rates this strategy as a strong one with 4 out of 5 stars.
The second part of the page is the overview where Chris outlines the Iron Condor strategy with the following text: Iron Condor is a directionally-neutral credit strategy that aims to maximize cash flow while reducing risk. It is created by combining an Out of the Money Bull Put Spread and an Out of the Money Bear Call Spread. Iron Condor has limited profits and limited losses.
Next is the subsection of when to use it. Here Chris explains that an Iron Condor is great for channeling securities that are not expected to move much in either direction before they expire. This strategy makes money if the underlying security or stock moves sideways; however, it could lose money if it moves strongly in a bullish or bearish direction.
Next is the subsection on how to trade it. Here Chris explains that the Iron Condor is created by doing four, yes you read that right, four simultaneous transactions which are selling an Out of the Money put, buying a further Out of the Money put, selling an Out of the Money call, and buying a further Out of the Money call.
As with our previous examples, the second column of the page covers a brief trade example and with four legs in the last section. This section helps explain the price positioning of each leg of this strategy and remember that all four contracts should have the same expiration date. The rest of this column covers the Greeks when using this strategy, and finally, a breakdown of the Pros and Cons of using the Iron Condor strategy. Chris lists the Pros of this options trade: it has a high cash flow, a neutral Delta, provides limited risk, and a high chance of keeping credit. As for the Cons, this trade does have limited rewards, and the downsides are greater than the upsides. Plus, there are high commission costs associated with this trade and high margin requirements.
I know I have said this before, but it bears repeating as this document will save you time, save you money, and help you quickly find the options strategy that is just right for you and your trading goals. There are seventeen live training recordings where Chris goes over these strategies and eight different jam sessions classes, which are open questions and answers classes. Finally, you also have access to the Boot Camp classes, which lead up to the Options accelerator class, and as a bonus, Josh Hesse’s Morning Glory Strategy class. In closing, even though the live classes are over, you could spend months reviewing the recorded information provided and benefit significantly from it. If that interests you, then click on the linked image to purchase the class.
Join us next time as we take a look at the revamped TSU class, the Foundations of Trading, which used to be the Foundations of Stocks and Options class, and get your trading started right by building a solid foundation upon which you can stand. See you soon!