Short Iron Condor: Strategies, Risks, Real Life Examples

Short iron condors are powerful premium collection tools that allow traders to clearly define their maximum profit and maximum loss. Discover OUR short iron condor strategy, alongside a real life trade example from our iron condor service.

Justin Nugent

This article was last updated on 10/24/2022.

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Short Iron Condor Breakdown

The Short Iron Condor is a highly versatile premium collection for stagnant prices in a highly volatile environment.

Bias: Market neutral Strategy: Bearish volatility
Construction: Sell a vertical put spread, sell a vertical call spread Breakeven: Long put strike plus credit OR long call strike minus credit
Max Profit: The credit received for entering the trade Max Loss: Width between the vertical strikes minus the credit received

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What is a Short Iron Condor?

Short iron condors benefit from price stagnation, a decrease in volatility, and the passage of time. 

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Time decay depicted over the course of 100 days. The closer an option gets to expiration, the more the option decays — and the more profitable your short iron condor becomes.

A short iron condor is a combination of two vertical credit spreads — one using puts, and one using calls. If you’re selling an iron condor, you are predicting that the price of the underlying stock will remain between the two short strikes. This is where the strategy will achieve its max gain. 

The longer the underlying stock remains between the strikes, the more time-decay will take effect, draining the extrinsic value from the two credit spread components, thereby helping your condor soar. 

Short iron condors are also highly versatile, making them a popular strategy for advanced traders. Because the strategy uses both long and short calls and puts, the strategy can be morphed into a long call, a long put, a singular credit spread, and many other strategic variations. 

Short iron condors are powerful tools for premium collection, but there are a few things you should keep in mind before deploying this highly versatile option strategy. 

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Short Iron Condors: Do’s and Don’ts

Do: Enter during periods of high volatility, expecting that volatility to soon subside Don’t: Enter if you have a directional view of the underlying stock
Do: Select meaningful strike prices. A particular moving average, a flat line, etc. Don’t: Go farther out in time than you need to. At 14 days to expiration, theta-decay ramps up. That’s a common amount of time to take advantage of premium collection strategies. The further out in time you go, the more you’re risking an adverse event that will challenge your thesis.
Do: Monitor the stock’s price closely for a change in trend. If you see the stock confidently breach an area of resistance, you should be ready to adjust the trade as necessary to take advantage of the change in the trend. Don’t: Enter a trade without a plan. Know exactly where your trade thesis becomes wrong. Have a plan of action, whether it’s closing or morphing the trade. Have a set profit goal. Once you have a plan: Stick to it! (Don’t get greedy)
Do: Use liquid instruments, and be mindful of the bid-ask spread. Because short iron condors utilize four separate options (each with its own bid-ask spread), you’ll want to ensure that each of the option legs involved have ample open interest. The last thing you want is to be stuck in a trade longer than you have to, or to lose money on bad order execution. Don’t: Wait until expiration. It’s often better to take most of the max profit than it is to endanger your unrealized gains in pursuit of those last few dollars. Have a profit goal in mind when you enter the trade, and stick to it!

Time Bandit Options: Our Short Iron Condor Strategy

In Market Rebellion’s Time Bandit Options trading service, Chief Options Strategist Ryan Mastro reads the charts, basing the strike prices of an iron condor around key technical levels in order to exploit the “morph” to his advantage. 

For example: Imagine the short-put leg (the higher of the two put legs) of your iron condor is placed on the 50-day SMA, and the basis of your trade is that the stock should hold this key level.

It bounces off the 50-day SMA a few times, initially preserving your thesis — until a piece of bearish news breaks, sending it straight through the upper put-strike. You have three choices: 

  • Watch helplessly as your thesis is rendered obsolete, letting your short-iron-condor achieve max loss as the stock price remains trapped underneath the 50-day SMA (not recommended).
  • Give up and close the trade for a loss.
  • Morph: With the stock having descended below the 50-day SMA, perhaps your trade thesis has shifted from market-neutral to market-bearish. If that’s the case, you might decide to salvage the trade with a morph: buy-to-close the call spread (the profitable half of your trade), and buy-to-close the short put, leaving you with only a long put.
    This means your option strategy has changed from neutral to bearish, and your volatility outlook has changed from bearish to bullish. In short: If your technical analysis was spot on, the stock may have more downside to go, and your short put is perfectly positioned to capitalize on that downside. 

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In Time Bandit Options, the third choice — the morph — is commonly what we use when a stock has a technical breakdown (or breakout) whilst we are in the trade. Being able to stay nimble is what will keep you alive in this fast-paced market, and it’s what makes the short iron condor so versatile.

Unusual Options Activity

Short Iron Condor Strategy: Real Life Trade Example

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This is last week’s short iron condor trade from TBO in Costco (COST) with strikes placed above the 200-day SMA ($511.60) and below the $467.90 flat line. 

The trade (450/460/515/525) offered a max credit of $2.10 (the reward) and a max loss of $7.90 (the risk). The profit and loss diagram looked like this:

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This was on 7/06, with COST trading at $491. Throughout the next 5 days, COST traded within the max-profit range of the short iron condor, never breaking above or below the 200-day SMA or the $467.90 flat line. By 7/11, the same short iron condor was trading for a credit of as low as $1.03 — less than half of the reward our traders could have entered it for. 

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With just 4 days to go, and more than 50% of the credit gained, it’s likely time to start thinking about closing the spread for a profit. 

Short Iron Condors: The Bottom Line

Short iron condors are a great strategy for a specific situation: bearish in volatility, neutral in price. But like any options trading strategy, having a well-defined plan of action makes all the difference. Knowing why you’re entering the trade and where you need to shift your strategy goes a long way in helping you stay profitable. 

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