How to use an Iron Condor

An Iron Condor is used when the existing stock does....nothing, a sideways trend! How can we do this, you ask? Does anyone remember how credit spreads work? Bull Put? Bear Call?

If you use both strategies on a sideways trending stock you can make money. Let us look at WMT stock, it has been moving sideways for awhile. You might be thinking it is going to keep doing nothing, no big moves, not very exciting, right? It tends to bounces between $45 and $51.

What if you bought a $40 Put for $.30 and sold a $45 Put for $1 (a Bull Put Spread) for $.70 profit and you also you bought a $60 Call for $.20 and sold a $55 Call for $.60 for $.40 profit. This is an Iron Condor.

What does the stock have to do for you to make that money? Nothing and that is what this stock likes to do. It's a lazy stock. Wouldn't you like to bet that a couch potato isn't going to do anything today?

Say you are right 85% of the time, let's Show You The Money:

($1.1)*(.85)-($3.9)*(.15)= $.35

Which means you would make an average of $.35 per trade. You just have to be right 85% of the time.

What if you are wrong? Let's see...it breaks out to $43. Can you still make money? Probably, if you think it will continue to go down you can buy back your $45 Put for $3.

Now you own a $40 Put on a stock that is going down along with a Bear Call Spread. The stock continues to go down and you sell your $40 Put for $2.7.

Now I'll Show You The Money...

$1.1+$2.7-$3=$.8

You made $.80 and you were wrong. Don't you just love the Stock Market? You can make money even if you are wrong!

Remember to always paper trade your strategies before putting any real money into the stock market.

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