How To Make Monthly Income with the Iron Condor
How Trading Iron Condors are like Owning Your Own Insurance Company
What is an Iron Condor? An Iron Condor is a delta neutral strategy – which means it is a strategy used when the trader who put it on has no bias of the direction of the market. The trader doesn’t care if the market goes up. He doesn’t care if it goes down. And he doesn’t care if the market just stagnates and stays right where its at.
Even better, Iron Condors allow traders to realize significant profit in any of these three scenarios. The trader makes money if the market goes up – goes down – and stays right where its at. Just as long as it doesn’t go up TOO much – or down TOO much.
But the Iron Condor trader knows (if they are trading the right vehicle) that the odds say that in most cases the stock or index being traded will do just that: stay within a range.
Iron Condors are constructed to have a high probability that they will be profitable as long as the market stays within a specific range. This is done by SELLING options at the outer edges of a stock or index range – and collecting the premium.
Think of it like an insurance business. Insurance companies get paid premiums to cover the loss in the event that something out of the ordinary happens. Insurance companies know that the odds are low that whatever they are insuring against will actually happen – and they have also done the math and calculated that based on the probabilities and the premiums they receive they will be profitable.
When we sell Iron Condors (at least when we do it the right way) we are just like an insurance company. We sell options at strike (stock) prices that we know have a low probability of ever getting hit by the stock or index. And when they don’t (as the probabilities say they wont) we get to keep the premium as our profit.
But – even though the odds are in our favor – it is absolutely possible that you could realize a loss – and a significant one. The way to keep this from happening is through proper management of the position and learning how to correctly place, manage, adjust, and profitably exit the Iron Condor trade.
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