What is an Iron Condor trade in options?
- Asked By
- Updated On:05-Mar-2021
- Replies:2
Short Answer
An Iron Condor is a 4 legged hedged option strategy that includes selling 1 slightly OTM (Out of The Money) Call as well as 1 Put option and, buying 1 Slightly Far OTM Put & 1 Call options in order to cover the risk of the Naked short positions. This strategy is implemented when the overall outlook of the underlying asset is neutral or rangebound and no major moves in any direction are anticipated. The maximum profit and loss are capped in this strategy, and by hedging, margin benefits can be enjoyed.
Detailed Answer
Iron Condor
An Iron Condor is a Multi-leg Option Strategy that consists of 4 legs used mainly to mitigate the risk of a Short Strangle strategy. It is also used to get the margin benefit by hedging a naked position from NSE. This strategy is implemented when the outlook of the price is to remain sideways or in a range and is not expected to make any major movements in either direction.
An Iron condor can also be termed as a modified “Short Strangle” which enables the trader to Cap the losses on both the ends of a Short Strangle that could lead to unlimited losses. It is a Net Credit Strategy in which the Credit from selling of The Call & Put option is used to buy an OTM (Out of The Money) Call & Put options as a hedge to the actual strategy which is a Short Strangle. The maximum profit in this strategy is the total Premium collected and the maximum loss is also capped at a certain extent.
To implement an Iron Condor, the following options have to be executed-
- Sell a slightly OTM (Out of The Money) Put Option
- Sell a slightly OTM (Out of The Money) Call Option.
- Buy a farther OTM Put option.
- Buy a farther OTM call option.
Some things to keep in mind while implementing this strategy-
- The overall outlook of the underlying security has to be neutral to sideways.
- The spread (Difference of the Strike Prices) between the PUT & CALL options bought should be similar to the Call & Put Options Sold.
- All the options executed should be of the same expiry and all the legs should be of the same underlying asset.
- The total number of Options Sold should be equal to the number of options bought.
The following Price payout graph will of the above implemented Iron Condor strategy on Nifty-
In the graph above, it is clearly visible that the maximum loss is limited to a fixed extent and the profit range has narrowed but is far better than that of the unlimited loss in a Short Strangle.
The Profit & Loss Graph of a Short Strangle looks like this-
Here the profit range is slightly broader than that of an Iron Condor but the maximum loss potential is unlimited if any Black Swan event occurs.
Hence by now, it can be clearly understood that the Iron Condor Strategy is a better option than that of a Short strangle as there are multiple benefits of the Iron Condor such as the Margin Benefit from NSE for hedged positions as well as limited losses.
Ask Your Query for FREE, Get quick answers from our FINTRAKK community!
Discussion (1)
Option Selling requires large capital. Due to this many small retail traders resort to option buying where the margin money required is very less. Although with various strategies you can reduce your overall risk and margin required in Options selling. Know more about how much money is required to start option selling. The difference in the margin money required for selling a naked Option vs Selling a Hedged Option here.
Option Selling can be considered as a full-time business for traders. Similar to a business, you cannot expect extraordinary returns in options selling. You, as an options seller have an edge over option buyers and the chances of making money are higher. Know how much money can be made by selling Options.
Options trading involves two aspects. One is options buying and the other is options selling. To buy an ATM option you will require around Rs 10,000 to Rs 25,000 per lot for an Index or stock option. On the other hand, you will require close to Rs 95,000 to Rs 1,50,000 for selling 1 lot of index option. These amounts change with respect to the time remaining to expiry and other market conditions.
Sensibull is an online Options trading platform that provides various Analysis tools that can be used to have a better understanding of the Options as well as to create and deploy various Option Trading Strategies that can be used by Investors & traders to Speculate as well as Hedge their existing portfolio. The Option Chain is an important feature of Sensibull. It is discussed in detail below.
With the increasing exposure of the stock markets, more and more people are trying a hand in options trading. Options trading have become a lucrative place for individuals to earn money. The reality is certainly different. More than 95% of individuals lose money in Options trading, There are various reasons behind this. Find out the reasons for losses and the steps by which you can be a profitable options trader here.
If you're looking for a straightforward and comprehensive take on options trading, then Sensibull should do the job perfectly. However, if you're and expert and want more complex trading tools, then Opstra is the one to choose.
Options trading is different from traditional share trading in many ways. Trading in options includes multiple factors like high leverage, delivery obligation on the date of expiry, unlimited loss potential, etc. All these factors make trading in options riskier.
In this current day and age, options trading has become the new cool thing that everyone wants to try. There are many option trading platforms out there that provide various Option trading tools. Sensibull and Opstra Definege are 2 of the most prominent names in the industry.
Both of them provide all the necessary tools like OI (Open Interest) Charts, PCR (Put-call Ratio), IV (Implied Volatility) chart, etc. But the main question lies, which one of them is a better platform for Options trading. Let's find the answer to that question.
Virtual trade is a feature in Sensibull which allows the users to be educated about option trading by trading in real stock scenario with real money. Sensibull will also helps the users to learn about trading in much detail.
Options Buying requires a lot of skills and effort from the trader. It is not easy to generate profits using Option buying. Many factors work against Options Buying. Let's look at some of the factors and find out if it's a good idea to start Options Buying with small capital.
Harshil Patel
Iron condor strategy is quite a unique strategy where you make huge profits while covering up losses in the process. No doubt buying multiple options contracts can reduce losses, but it still requires an in-depth technical analysis to see how well the stock might perform based on your predictions.