Short Iron Condor: Strategies, Risks, Real Life Examples

Short Iron Condor: Strategies, Risks, Real Life Examples

by

strike price, strike price, strike price, strike price, maximum risk, maximum loss, maximum profit potential, net premium, upper breakeven point, higher middle strike call, net credit received, net credit received, stock price equal, higher strike call, price at expiration, lower breakeven point, underlying price, underlying price, underlying price, short call, bear call spread, credit spreads, two breakeven points, net debit, long call, credit received, net premium received, current price, short put, market neutral, payoff diagram, four options, long option, strike put, two breakeven, long 1, short 1,

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

Let us show you how to find Unusual Options Activity

Everything you’ve ever wanted to know about Unusual Options Activity—in one convenient insider’s guide.

What is a Short Iron Condor?

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

options trading, option trading, trading strategy, stock market, strike price, strike price, strike price, strike price, strike price, strike price, strike price, strike prices, strike prices, strike prices, implied volatility, breakeven stock price, price at expiration, lower middle strike, lower middle strike, lower middle strike, lower middle strike, lower middle strike, lower middle strike, lower middle strike, lower middle strike, lower middle strike, lower middle strike, lower middle strike, short iron condor spread, short iron condor spread, short iron condor spread, short iron condor spread, short iron condor spread, short iron condor spread, short iron condor spread, short iron condor spread, short iron condor spread, short iron condor spread, long iron condor, time decay, time decay, time decay, lower strike, lower strike, lower strike, lower strike, lower strike, lower strike, lower strike, lower strike, options strategy, options strategy, options strategy, options strategy, options strategy, bull put spread, bull put spread, bull put spread, otm calls,
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. 

Ready to start trading the technicals? Try Rebel Weekly. Ride the waves of market momentum with two actionable trade ideas designed to capture technical break outs and break downs — delivered to your inbox every week.

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. 

_

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

same expiration, same expiration, stock price, stock price, stock price, stock price, stock price, stock price, expiration date, expiration date, expiration date, net credit, net credit, net credit, net credit, underlying stock price, same expiration date, maximum profit, maximum profit, maximum profit, maximum profit, maximum risk, maximum risk, maximum loss, maximum loss, maximum loss, maximum profit potential, maximum profit potential, out of the money, net premium, net premium, upper breakeven point, upper breakeven point, higher middle strike call, higher middle strike call, net credit received, net credit received, net credit received, stock price equal, implied volatility, implied volatility, higher strike call, higher strike call, price at expiration, price at expiration, price at expiration, bear call, bear call, breakeven stock price, lower breakeven point, lower breakeven point, higher strike, higher strike, higher strike, iron condor strategy, bear call credit spread, underlying stock price stays, maximum gain, underlying price, underlying price, underlying price, underlying price, underlying stock's price, lower middle strike puts, middle strike prices, higher middle strike, higher middle strike, higher middle strike, short call, short call, lower middle strike, lower middle strike, lower middle strike, bear call spread, bear call spread, higher strike calls, lower strike price, minimal price movement, current stock price, breakeven points, breakeven points, breakeven points, middle strike, middle strike, middle strike, middle strike, middle strike, middle strike, net price, profit potential, profit potential, long iron condor, long iron condor, two breakeven points, two breakeven points, credit spreads, time decay, long iron condor strategy, limited risk, lower strike, lower strike, lower strike, maximum potential profit, underlying asset, net debit, different strike prices, strike price closer, maximum loss occurs,

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:

maximum value, ex dividend date, low volatility, credit received, credit received, combined credit, options expire worthless, strategy profits, options contract, time value, net premium received, short options, short options, short options, initially sold, iron butterfly, underlying security, in the money, bull put spread, current price, share price, bull put spread, one otm call, option strategies, options contracts, short straddle, market neutral, negative impact, business day, payoff diagram, payoff diagram, total credit, margin requirement, contract size, spreads defines, short strangle, strike call, strike call, strike call, maximum potential loss, put spread Source: ThinkOrSwim

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. 

Level Up Your Trading

Get a custom-designed trading program tailored to your individual needs, skill level, and schedule.

strike price, same expiration date, maximum risk, out of the money, price at expiration, underlying price, short call, current stock price, time decay, price of the underlying, options strategy, options strategy, long call, options contract decreases, time value, premium received, expire worthless, underlying instrument, in the money, break even points, break even points, bear spreads, expiration approaches, less money, long positions, payoff diagram, full position, maximum possible loss, break evens, limited profit potential, Tom calls, two short options, four options, short option, long options, long option positions, large move, less commissions, long options, strike put, strike put, strike put, short options at expiration, long 1, long 1, long 1, short 1, short 1, short 1 Source: ThinkOrSwim

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. 

Read More

Subscribe to Rebel Roundup for your weekly digest of market highlights and free trading lessons.
We’re on a mission to empower retail traders with the tools they need to succeed.

Read Next

Join a growing community of traders with Market Rebellion

Join the thousands of users daily!

Unlock UOA Trading Secrets

Watch our free 7-minute tutorial on how pro traders harness unusual option activity.

By clicking Get Access, you agree to receive marketing offers from Market Rebellion, and its affiliates, subsidiaries, or agents in the form of emails, pre-recorded messages, text messages, and autodialed calls at the email address and phone number provided above, even if the phone number is present on a state or national Do Not Call list. You recognize that you are not required to provide this consent as a condition of purchase and that you can withdraw consent at any time. Data rates may apply. By clicking below, you also agree to our  Terms of Use  and acknowledge our  Privacy Policy.