Credit Spread
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Home > Iron Condor Adjustments > Adjust Iron Condors

Adjust Iron Condors

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iron condor spread

The iron condor option strategy is a favorite trade among option trading investors both new to options as well as those who have been around the block and playing this game for awhile.

The iron condor is constructed from two credit spreads on the same underlying: a bull put spread and a bear call spread. The purpose of the trade is to try and take advantage of the fact that many underlyings stay contained within a range on their chart much of the time. By selling short term credit spreads on either side of where the underlying is currently trading at, the iron condor seller hopes to ‘cash in on both ends’ – and the majority of the time can do so as long as the underlying DOES stay range bound.

This trade is a probability trade – where the mathmatical odds say that the correctly chosen underlying should not penetrate the properly calculated range most of the time. Using a few tricks, iron condor traders can create trades where they have an 80% or better chance of winning any given month – meaning that if this same trade were to be put on ten months in a row, mathmatically it should win eight of those ten months.

So far sounds good, right?

Well hold your horses right there, my homey…

The problem is that while these trades offer a great probability of success – on the flip side they offer a horrible risk to reward. The same 80% trade set up mentioned above usually comes with a 9 to 1 risk to reward – meaning that the trader is risking 9 dollars to gain just 1. And once you do the math you can see that this creates a huge potential problem: if a trader were to win 8 months in a row and then hit his max loss in month 9 – this would immediately wipe out all of the previous 8 months of profit – and then some.

WHICH IS WHY…

Understanding how to properly manage and adjust these trades are SO critical.

For more info on how to learn to properly place, manage, and ADJUST iron condor trades, join our free option income trading newsletter by clicking here

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