In this article, we shall study a popular options strategy that helps traders profit from the range-bound market. It is a multi-leg strategy. Trader sells a call spread and a put spread of the same underlying asset having the same expiry; the only difference between them is strike prices. The main purpose of entering this strategy is to benefit from the low volatility and the low movement in the price. Generally, the strategy is used when the trader is sure the price will move within a range.
Market outlook of the Short Iron Condor options strategy:
The strategy is perfect in a low-volatile market and limited price movement.
This strategy proves to be most effective when the trader believes that the price will stay within a range.
Traders can profit from the time decay factor. With each passing day, the options contracts lose their value, which works positively for this strategy.
Traders must be cautious while implementing this strategy in a high-volatility market.
Setting up a short Iron Condor:
In order to set up a short Iron condor option strategy, traders need to identify the best options contracts available and finalize the price to trade that underlying asset. Now sell OTM Put spread and buy the OTM call spread, both having the same expiry dates but different strike prices.
Please keep in mind the risk-to-reward ratio while selecting the strike price.
Entering the short Iron Condor options strategy?
To enter the short Iron Condor options strategy, traders need to follow the below order:
Sell to open out-of-the-money put option
Sell to open out-of-the-money call option
Buy a low strike price Out-of-the-money put option contract
Buy a high strike price Out-of-the-money call option contract.
While buying and selling the option contracts, ensure they are equidistant from the current market price.
Break Even point of the Short Iron Condor strategy:
Upper break-even point = The higher strike price of the call options spread + the net premium received.
Lower break-even point = The lowest strike price of the put option contract spread - the net premium received.
Example of a short Iron Condor strategy:
Suppose the stock of ABC is trading at ₹50 in Feb. Then, to enter the Short Iron condor strategy, the below orders will be followed:
Buy a Put option contract having a strike price ₹40 expiring in March by paying the premium of ₹0.50 (₹50 per contract)
Buy a Call option contract having a strike price of ₹60, expiring in March by paying the premium of ₹0.50 (₹50 per contract)
Buy a Put option contract having a strike price ₹40 expiring in March by paying the premium of ₹0.50 (₹50 per contract)
Sell one call option contract having the strike price of ₹55 for the credit of ₹1 (₹100 per contract)
Thus, by entering the strategy, you received the net credit of ₹100, you received ₹200 and paid ₹100; the difference ₹100 is your profit.
Let us see a different scenario, what will happen if the stock closes at different prices:
Case 1 stock expires between ₹45 and ₹55, assuming ₹52 closing price. Option 1 will expire worthless because it has given traders the right to sell the contract at ₹40, not ₹52.
Option 2 will expire worthless because it has given traders the right to buy the contract at ₹60, not ₹52.
Option 3 will also expire worthless, as this contract has given traders the right to sell the contract at ₹45.
Option 4 will expire worthless, as this contract has given the traders the right to buy the contract at ₹55.
Thus, considering all the above points, the trader is left with the profit received initially of ₹100.
If the ABC stock closes either above ₹55 or below ₹45, all option contracts will expire worthlessly, and traders will have a profit of ₹100 only.
Thus, we can say that the Short Iron Condor options strategy is a limited profit and limited risk strategy.
How to exit from the Short Iron Condor strategy?
Traders may close the entire position if the price has crossed its range.
If traders assume to lose their profit or the risk is beyond the acceptance level, they must close their position.
Conclusion:
Thus, we have seen that the Short Iron Condor is a unique strategy to profit from the low movement and low volatile market. Traders can use the time decay factor in their favor to make money. However, the traders must monitor the market after implementing this strategy to reverse or close the trade if the price moves outside its range. If you thoroughly understand how this mechanism works and learn how to select the best strike price, this can avail you of consistent income even when the market is experiencing no movement.
I hope you have understood it very well, but if you still have any concerns regarding the short iron condor strategy, do let us know by reaching us at 8447445815 / 9909978783