How To Become Better At Trading Iron Condors In 10 Minutes
Trading in iron condors is a good option for beginner traders as they are relatively straightforward and can be a low-risk choice, but they are also useful for professional traders. It’s easy to become better at trading in them if you understand them thoroughly and follow the guidelines:
It is possible to make a spread order, specifying exactly which options we want to sell and buy, and also laying out what net amount we want to get. Using the spread order means we are protected against changes in the market price which go against us. We aim to get the price we want, or we leave the trade.
With the credit spread, we receive the credit into our account straight away. The broker will then keep the potential loss held in maintenance. This maintenance money cannot be traded off as it is the deposit for the deal. However, with an iron condor, which has the put spread and the call spread against the same underlying, and with the same expiry time, most brokers only hold the maintenance against the side with the greatest potential loss. The reason the brokers do this is that either both sides will be profitable, or one will suffer a loss, at expiry.
Using Iron Condor Formulas
Look for options which offer weekly expiration as they give investors more chances to trade. The successful traders will often go with a “50% Condor Formula”. This involves two stages and will help you become a better condor trader if you master it:
1) Remove the winning trades once you reach half of the maximum profit level
2) Remove the losing trades once the loss reaches double the amount that you took in.
3) Try until you find a strategy which works for you
4) The best formula for a beginner trader is to start with expiry dates of around 30 days combined with short strikes that have a delta of 0.10.
The strategy works on odds. If you are confident and choose good trades, following the guidelines, those odds will tip in favor of you. The best way to be profitable as an iron condor trader is to use multiple small trades and to remember to remove any positions which hit the profit or adjustment levels. Sadly, too many traders get greedy and stop following their trading plans as they hope they can squeeze out more money. However, it’s important to stick with your plan, be disciplined, and your losses will be kept to a minimum every time.
Understanding the Types of Iron Condors
High probability condors are the simplest form to understand and are perfect for a junior trader to start working with. They are robust strategies and work well in most types of market environment.
Super High Probability Condors are just another variation, but in these, the delta for the short strike price should be under 4. There should be a standard deviation of more than two from the underlying and it also requires a minimum of a 2% premium on each side. There is a tiny chance the market will move that much, but it is worth noting that a loss on this kind of condor would mean a total loss of all funds.
Low Probability Condors require a focus on clear detail, to monitor and move the trade position according to the rise and fall of the market prices.
Elements to Avoid
Trending volatility is when we see the market moving persistently in one direction. In bull markets, you will see the stock indexes going higher and you will see crashes in bear markets. Fast movement in either direction, can make your choice riskier. If it has been active very long, a quick move will risk putting you into a large loss. In order to avoid these two elements and become a better iron condor trader, you just need to make a few simple changes, such as:
• Kick off your trade using an upside hedge — start your business with long calls or bull call spreads so that you can upside the hedged risk.
• Purchase puts — Purchase some very out of the money options to help protect you against the risk of a market crash.
• Systematic adjusting — make sure you notice where the market has moved and adjust your trade accordingly
• Rolling — As they are spreads, if the market doesn’t go in your favor, then just roll one spread closer to the market price.
• Pain Points — Try not to worry about the trade so much that you give up on it at the wrong moment. Notice the areas and use strategies to protect and adjust your spreads.
Understand When It Is Time to Close the Trade
The main point here is to look to take the position off when there are around thirty days left before expiry. The aim is to hold the position while it loses most of it value through time — the best target is to aim for around half of the original credit. It’s important not to get over greedy with an iron condor as it is entirely possible to hit your profit target and then the stock moves out of range.
While it may appear to be neutral, it’s not due to the volatility. A short delta as outlined earlier, means that as stock prices go lower, you will profit. The passing of time will also cause the position to profit, so you will make a return as long as the trades are placed correctly and you have followed the guidelines outlined here to help you become a better trader.
Iron condors are ideal for new traders but also for experienced traders alike. It is relatively simple to become better at trading in iron condors just by doing your research and monitoring the marketplace so you can make adequate adjustments as and when required. It is imperative to work out your potential profit, potential loss and your adjustment points, before you set on the trade, and keep monitoring.