The Iron Condor

Wow, what a crazy name - iron condor! Simply put the this technique involves selling two separate credit spreads, a bull-put spread and a bear-call spread, on the underlying security. The funny name is derived from the way a graphical representation of this technique look on paper. The beauty of this options technique is that a double credit is taken in at the outset. Like individual credit spreads, the goal is to have all options expire worthless at which point the entire double credit becomes income free and clear. Iron Condors are usually established with a month or less time remaining on the option so that the full benefit of time decay works for the investor.

The iron condor is best used on a low volatility vehicle such as a stock index ETF or a low-beta stock. Also, it is best used in a quiet market. The maximum gain on an iron condor is equal to the credit received upon opening. The maximum loss is limited and can occur when the price of the underlying rises above the strike price of the bought call, or sinks below the strike price of the bought put. If this occurs the investor should consider taking evasive action to get out of the losing side of the position. So, the savvy investor who is thinking about using the iron condor technique is looking for a particular type of underlying (low-beta) and a particular type of market (quiet and not volatile). A steady stream of income can be acheived with iron condors in range-bound markets.

For an excellent treatise on the subject, read the book "Profiting with Iron Condor Options" by Michael Benkifa. He summarizes a number of finer points and learned wisdom on selling iron condors profitably.

Without a doubt this is an advanced technique. It is not for everybody. Do not attempt this straight away. Paper trade this until comfortable. However, some folks specialize in this option technique. They have pre-identified a universe of slow-moving underlyings and wait for the proper range-bound market conditions to set up...then they rake in the income.

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