The Iron Condor SpreadUnlike most investment vehicles the iron condor spread allows you to profit from a stock when the stock does nothing at all, or very little. This strategy involves selling 1 far out of the money bull put spread and 1 far out of the money bear call spread. When you do this you make a premium from your trade but carry the risk of getting exercised. Example Here we see RUT trading between $385 and $550. If we were trying to trade every swing on this stock we could be getting stopped out constantly, so instead of trying to predict its movements we take a market neutral Stance on it. We sell the $360/$370 bull put spread and make $1.1 off of it. We also sell the $560/$570 bear call spread and make $.90 off it, for a total profit of $2. 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?
Risk Now there is risk. If the stock falls below $370 we will have to buy the stock at $370 and sell it at $360. If it rises above $560 we will have to buy the stock at $570 and sell it for $560. Either way our max risk is $10 minus $2 from premium made or $8. Probabilities Most people are ok with this kind of trade because the probabilities of it working are so high. By selling far out of the money options you are allowing the stock to have a wide range before it starts to affect you. Managing risk Of course even with a high success rate you will not make money iron condor trading in the long run unless you can successfully manage your risk. Personally I do not like having any more than 10% of my account in Iron Condor trades at any time because if the market crashes you can lose your shirt. Another helpful strategy for managing your risk on these trades is not taking the whole risk. It is ok to exit a losing trade before it bankrupts you. So how much loss is too much? That depends on the individual. Ideally I never want to take a loss that is more than 1.5 times my maximum gain. In the example above if I make $2 then ideally we want to exit the trade before I lose more than $3. You may be different and exit if it gets to 2 times your max gain. Or you may exit if you lose your 1 times your max gain. But having some sort of set limit on the amount you can lose has worked out in the past.
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