The Iron Condor trading Strategy has turned out to be much popular has it is a good way of growing your account by 10% or much more per month. This is a good strategy that do not require extensive and complicated technical analysis, nor will you be in front of the computer for many hours. At the same time, it is not a ‘set and forget’ strategy. You will need to pay attention, because even though it is not nearly as risky as simply buying options, it does have a higher risk-reward ratio than other popular strategies, like credit spread trading. So, here are some important things that you need to do and they will help you to be successful when dealing with Iron Condor.
1. Think like a credit spread trader
Even though most brokers (especially online ones) will allow you to reduce commission costs by trading an iron condor as one trade, you will do best by thinking of the process as if you were selling two credit spreads on the same stock. This means more profit than straight credit spread trading, but also place some limits on your trade. The magic of credit spread trading is that as time decay kicks in, the options that you have sold become valueless, and so as long as your trade is within the boundaries, you be required to do nothing to make a profit.
2. Trade the Indexes
Indexes are much slower moving than individual stocks, and have fewer sudden jumps or gaps. SPY, DIA and RUT are perfect targets for iron condor, because their movements are a conglomeration of all the gyrations of their member stocks, and so provide a significantly more stable base for trading.
3. Beware of trends
Iron condors work best with non trending stocks. Place your trade on a stock or index that does not have a clear trend, or a very weak trend, as measured by the ADX indicator or Wilder’s DMI.
4. Be ready to make adjustments
Factors like profit announcements, industry announcements or market impacting news can cause the underlying index to take a relatively sudden jump. This is where it is so important to think in terms of two credits spread trades. If there is a gap, then one side of the condor will quickly behave like a credit spread that has lost all its value, thereby locking in your profit. The other spread (in the direction of the jump) will rapidly increase in cost, and so undercutting the profit you made from selling the options. There are several important adjustments that you can apply to your trade to not only save your profit but increase it.
Although this Iron Condor plan is not very complicated, there are several factors that make it both more flexible and at the same time provide more opportunity for things to go wrong if you don’t know about them. This is why its good to study the strategy thoroughly before trading, make sure you understand all the parameters, and paper trade for a few months before committing real money to the trade.
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