The Iron Condor is an options trading strategy used by many option traders for generating monthly income. This strategy gives profit when the underlying stock or index stays within a certain range over the life of the trade.
The Iron Condor is profitable when the underlying stock or index goes
- Up a little
- Down a little
and gives loss when it goes up or down too much.
Let’s say Nifty is currently at 10,000 and you expect it to remain in the 500 points up-down range over the next month. You can write 10500 call options and 9500 put options. If Nifty remains in this thousand points range of 9500-10500 you make the profit.
The range you expect will give profit if things go as per expectation which doesn’t always happen in the real world. If Nifty crosses 9500-10500 range there is a possibility of bigger loss. To prevent this loss some protection is required. This protection can be obtained by buying the 10700 call options and 9300 put options. In the case of violent movement on any side, this long options will reduce some loss.
Which Expiry month to trade
This strategy is designed to take maximum advantage of time decay, therefore it is good to take a position in a month ahead expiry. Generally, the sweet spot for iron condors is anywhere between 40 and 60 days to expiry.
When to book profit or loss
This is a complete range-bound movement-based strategy. We are going to make a profit only when the price remains within the band. If the range is breaking losses can be very high, therefore it is good to exit when the range is broken by 100 points, in the case of Nifty.
Like in our example we had a sell-side position in put and call options of 9500-10500 if the price touches the level of 9400 or 10600 we should exit and book the losses.
For booking profit, you can either wait for the options to go zero or you can book the profit when it is giving 50% of the calculated profit. I prefer to book, when 50% profit is there and take the next month the same strategy trade.
Say you have
- sold the 10,500 Call option at 60
- sold the 9500 Put option at 50
- Bought the 10700 call option at 20
- Bought the 9300 put option at 15
At the expiry, all will go zero in case of range-bound movement in the band of 9500-10500
The maximum profit will be 60+50-20-15 = 75 points
and if you are getting 50% of that, i.e 35-40 points profit, you can start booking the profits.
When to take the trade
Option premium depends on volatility. Since we expect to make a profit by selling the option. It is necessary that the option premium is moderately high. In the case of Nifty, if the implied volatility is 15+ I prefer to take the trade when it is less than 12 I prefer to avoid the trade.
Success Rate: This strategy will be profitable 90% of the time. Discipline is very important. Loses can be very high if you continue holding the position when the price is breaking the range. So always respect the stop losses.
Hence we always suggest our readers not to trade emotionally and just book the losses if the range is broken. You can always recover in the next trade.
So, this was all about the Monthly income Iron Condor Options strategy. Let me know what you think about it in the comments.
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Abhishek is an Engineer MBA in Finance and Certified Research Analyst. He is an active trader and investor in the stock market since 2010. Follower of the philosophies of Warren Buffet and Peter Lynch in investing and trend following in trading.