Click here to see descriptions of the different TradeFolio products we offer |
 Iron Condor Spread Strategy |
PowerOptionsApplied utilizes the Iron Condor option strategy for its Meridian, Centium and Optium TradeFolios™. An Iron Condor consists of a bull-put credit spread in conjunction with a bear-call credit spread creating a neutral position. A neutral position is profitable when the underlying stock or index does not move significantly up or down from the point of initial entry.
Iron Condor, What's the Big Deal?
At some brokers, an Iron Condor position can generate more "bang for the buck", as they allow the margin required for the Iron Condor to be the maximum of the margin required for the bull-put or bear-call position, instead of the sum of the margins. Some brokers allow this special margin consideration for the Iron Condor since for an Iron Condor, both spread positions (bull or bear) cannot suffer a loss simultaneously. For example, an Iron Condor position consisting of a bull-put position and a bear-call position with each position separately requiring $10,000 of margin and having a potential return of 5% would have a joint potential return of 10% for trades with brokers allowing for the special margin consideration, potentially doubling the return of an investment. Additionally, the Iron Condor position aids in alleviating losses because even when one of the spread positions (bull or bear) incurs a loss, the remaining position generally remains profitable and helps reduce the overall loss and occasionally the profitable position can even overcome the loss of the other position producing an overall profit.
What if the Market is not Neutral?
Large market movements do happen occasionally, causing potential problems for Iron Condor positions, however, the Iron Condor position has some flexibility for managing volatile market conditions through the judicious closing of positions with a high likelihood of experiencing a loss.
Example
For example, suppose the bear-call position of an Iron Condor on an index has a short option strike price of 1000 and a long option strike price of 1100, as long as the underlying index closes below 1000 at expiration, the bear-call position will be profitable. But, after initially entering the Iron Condor position the market moves higher and appears it is going to continue to move higher, and the index price is getting close to the short strike price of 1000. At this point, totally exiting the bear-call position (closing the short and long call option positions) will most likely incur a loss. However, closing only the short option position has the potential to alleviate a loss, because if the market continues moving higher the long position may increase in value, reducing the loss and possibly even resulting in a profit. The drawback to the strategy of only closing the short option is that a market reversal could result in an even bigger loss due to the decrease in the value of the open long position, but many times in a stop-loss situation the long position is small in value and the additional loss incurred by a market reversal is small and worth the gamble.
So What?
The payoff from the Iron Condor can be lucrative, but requires a lot of time and effort to manage and maintain and requires analysis to find an appropriate Iron Condor position to enter, to select stop-losses and to manage and monitor positions. A lot of investors do not have the time in their busy schedules to adequately trade Iron Condor positions, which is why PowerOptionsApplied developed the Meridian, Centium and Optium TradeFolios™. PowerOptionsApplied selects Iron Condor positions, selects stop-losses and manages and monitors the positions in the TradeFolios™.
|
|
»» Option Basics
