Depending on the time span, some stock market statistics point to an average return of around 10 percent per year. That’s not a bad years work for just throwing your money at the market and patiently waiting it out year after year. But what if 10 percent per year is not good enough, and you want more – like 25 percent per month. Well, the good news is that it is easy to make 25% per month if you have an options trading account. And you can make those 25% monthly gains with just 10 minutes of work per month. But the bad news is that if you are not prepared and knowledgeable, you could easily wipe out all your profits and more in a single bad month.

The iron condor is one method that traders use to make 10 percent per month. Iron condors can be traded on any optionable stock or index, but to avoid huge earnings or event related swings in price, many choose to utilize the iron condor only on an index. The iron condor is an option credit spread involving 4 simultaneous option positions, a short call and a long call, and a short put and a long put . The strikes of those 4 positions are based on the trader’s opinion of where the underlying will land on option expiration day. One tool that traders use to make their determination is to look at past support and resistance levels. Take a look at this yearly chart for the Russell 2000 index that shows a few support and resistance levels:

There are many ways to trade iron condors but all the methods can be lumped into 2 categories – active or passive. The active iron condor trader expects to maximize monthly returns through multiple adjustments of the channel legs, either reacting to, or in anticipation of market moves. A passive iron condor trader makes a single iron condor trade each month, and either rides it out through expiration, or closes it early for a partial loss or profit, but has no intention of adjusting.

The passive iron condor trader only chooses the range and does not need to determine the exact value of the index at expiration. (3rd Friday of the expiration month) As an example, lets assume that a trader wants to make a bet that the Russell 2000 will fall between the 650 and 750 range by August expiration. The next step would be to look at the August options chain and find the 4 individual option legs that would combine to form an iron condor for the 650:750 range.




The 4 option legs needed for an August iron condor with the 650-750 range are:

  1. Short the 750 call, last value at 2.02
  2. Long the 760 call, last value at 1.20
  3. Short the 650 put, last value at 8.05
  4. Long the 640 put, last value at 6.30

The above combination would result in a total net credit of $2.53. Since option contracts are always in lots of 100, the initial credit on the account would be $253. In the absolute ideal case, the Russell 2000 would stay within the 650-750 channel all the way through expiration, in which case all 4 option legs would expire worthless. But the initial credit of $253 would be the for the iron condor trader to keep.

But there is substantial risk on the above trade that the Russell could extend above 750 or below 650. The maximum loss would be incurred above the 760 level or below the 640 level, and would be equal to the length of the largest spread on either side minus the initial net credit. In the example above, the length of the spread on each side (640 to 650 or 750 to 760) is the same $10, or $1000 per contract. So the risk on the trade is the $1000 maximum spread minus the initial $253 credit, which comes to $747. In percentage terms therefore, the results of the max gain and max loss are:

  • 25.3% monthly return ($253) in the example above for options that expire worthless
  • 74.7% monthly LOSS ($747) in the example above if the index is above 760 or below 640 at expiration

So as you can see, it is possible to earn substantial returns with advanced options strategies such as the iron condor, but there is also significant risks involved as well. Notice that the sum of the maximum return percentage and the maximum risk percentage will always be 100%. You can always close the iron condor trader early to realize a partial profit or a partial loss, but you should be prepared with an understanding of how option time decay will affect your position at various time to expiration levels. Don’t wait until the trade moves against you to figure that out; be prepared with this knowledge before entering the trade!

For additional reading, I recommend:
The Option Trader Handbook: Strategies and Trade Adjustments (Wiley Trading)
The Option Trader Handbook: Strategies and Trade Adjustments (Wiley Trading) by George Jabbour

Disclaimer: There are no accuracy guarantees as to the the information above, or any information on Geldpress. No information above, nor any at Geldpress shall be considered as a recommendation.

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