Chicken Iron Condor: How You Can Use It Effectively
Understanding the Iron Condor
Before we dive into the details of how to trade options with the chicken iron condor strategy, let’s first review the basic principles of the iron condor strategy and how it differs from the chicken iron condor strategy.
The iron condor strategy is a neutral, defined-risk strategy that involves selling two vertical spreads: a call spread and a put spread, with different strike prices but the same expiration date. Normally, traders aim to collect about 1/3rd the width of the strikes.
For example, if you are trading a 10-wide iron condor, you will want to collect $3.33 in premium.
The purpose of selling both a call credit spread and a put credit spread is to create a range-bound position that profits from a stock trading within a specific range until the options expire. The range is determined by the strike prices of the sold options, which are also known as short options or short strikes.
If the stock continues to trade between your short options, you will generate a profit. However, if the stock price goes beyond your short strikes, you have the long options to help hedge and limit your risk.
What is a Chicken Iron Condor?
The chicken iron condor strategy is a variation of the iron condor strategy that involves selling narrower spreads for higher premiums. Instead of collecting 1/3rd the width of the strikes, you generally collect 50%. For example, if you are trading a 5-wide chicken iron condor, you’d collect about $2.50.
The chicken iron condor strategy aims to reduce your max loss and collect more premium while still taking advantage of theta decay and high implied volatility. The chicken iron condor is a great strategy for those who prefer a more advantageous risk-to-reward ratio since it's 50/50 instead of 33/66.
Chicken Iron Condor Risk Diagram
When is a Chicken Iron Condor Better Than an Iron Condor?
A great use case for the chicken iron condor is during earnings announcements. Earnings announcements generally equate to high implied volatility and large price swings.
Since the chicken iron condor will reduce your max loss, large price swings will not hurt you as much as a traditional iron condor. Additionally, earnings allow you to collect a significant premium while still going relatively far OTM.
Generally, earnings trades are either an instant win or a loss since they will move significantly in one direction or not much at all. Therefore, the chicken iron condor allows you to collect more premium and reduce your max loss, which helps with both losers and winners.
For example, if you place a chicken iron condor trade before earnings and the price moves significantly, it will likely be a max loss, which is reduced with a chicken iron condor.
If, after earnings, the stock price hardly moves, the chicken iron condor will pay more than a traditional one since you collect more premium. Therefore, a traditional iron condor is only better than a chicken iron condor during earnings if the stock moves just a bit more than expected since you are further OTM and can withstand a slightly larger move.
Advantages and Disadvantages of the Chicken Iron Condor
While the chicken iron condor seems like the perfect strategy for earnings, it is not without its pros and cons.
Chicken Iron Condor Pros
Collect more premium
Low max loss
50/50 risk-to-reward ratio
Lower volatility risk
Chicken Iron Condor Cons
Higher gamma risk
Smaller profit zone
Lower probability of profit
Chicken Iron Condors | Bottom Line
The chicken iron condor allows you to capture higher premiums and lower losses in high volatility markets while increasing flexibility and reducing margin requirements. However, it also has a higher gamma risk and a smaller profit zone than the regular iron condor strategy.
If you want to learn more about options trading and the chicken iron condor strategy, we invite you to join the Haikhuu Trading community. Haikhuu Trading is a discord community of active traders, both professional and beginners, who learn and trade together.
You can access valuable resources, such as books, courses, webinars, or simulators, and interact with other traders who share their insights, experiences, and feedback. You can also get personalized guidance and support from our expert mentors and coaches, who can help you improve your skills and confidence in options trading.
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