tastylive Iron Condor: Strategy and Mechanics
Iron condors are a popular options trading strategy known for their directionally neutral and defined risk characteristics. This article will explore how iron condors work and how to manage them for maximum efficiency.
We'll also dive into tastylive's entry tactics, trade management techniques, and offer a practical example of trading an iron condor using their approach.
What is an Iron Condor?
An iron condor is a neutral options trading strategy where you want to stock to trade within a range to make a profit.
The iron condor is the combination of a put credit spread and a call credit spread in a single trade.
To make a profit trading an iron condor, you want the stock to trade above the put credit spread and below the call credit spread so you benefit from theta decay.
The iron condor strategy requires you to execute four legs in a single order:
A short call option (higher strike price)
A long call option (even higher strike price)
A short put option (lower strike price)
A long put option (even lower strike price)
The strategy profits when the underlying asset trades within a certain range through the expiration of the options contracts. It benefits from time decay and decreases in implied volatility, making it an attractive choice for traders seeking to capitalize on non-movement in the asset's price or a decrease in implied volatility.
Iron Condor Payoff Diagram
The payoff diagram of an iron condor spread portrays a range of profit where the stock must stay between for the trade to generate a profit.
When you trade an iron condor, you want the stock to stay above the short put strike and below the short call strike price.
How to Set Up an Iron Condor
To set up an iron condor, you first construct an OTM put credit spread. Next, you construct an OTM call credit spread.
Generally, traders prefer to buy the wings equidistant from each other. For example, if you sell the 90 puts and 110 calls, you can buy the 80 put and the 120 call wings, making a 10-wide iron condor.
The assumption with an iron condor is that the stock trades within a range and implied volatility decreases. Similar strategies include the twisted sister and jade lizard, where you don’t buy a long option for one of the sides of the trade.
tastylive’s Iron Condor Entry Mechanics
tastylive emphasizes the importance of premium collection at trade entry. Their approach is as follows:
Aim to collect a premium equal to 1/3rd the width of the strikes upon trade entry.
For example, if the iron condor has six-point wide spreads, tastylive looks to collect $2.00 in premium for the trade.
This approach gives them a probability of success of around 67%, which they consider acceptable.
Managing Iron Condors Like tastylive
tastylive's strategy doesn't stop at trade entry. They have clear guidelines for closing and managing iron condors:
Close iron condors when reaching 50% of the maximum profit. This increases the win rate by taking risk off the table and locking in profits.
Manage iron condors by adjusting the untested side (profitable side) of the spread. They roll the unchallenged side closer to the stock’s current price to collect more premium. In some cases, they create an iron fly by rolling the untested spread to the same short strike as the tested spread.
Practical Example: tastylive's Iron Condor in Action
Let's walk through an example of setting up, closing, and managing an iron condor trade using tastylive's approach:
Set up the iron condor with six-point wide spreads and collect $2.00 in premium (1/3rd the width of the strikes).
Close the trade when reaching 50% of max profit (e.g., when the value of the iron condor is $1.00).
If one side is being tested (e.g., the call side), manage the trade by rolling the untested put spread closer to the current stock price, collecting additional premium.
Iron Condor vs. Strangle
A short strangle is when you sell an OTM call and put, which is an undefined risk trade. An iron condor is a short strangle with wings to make it a defined risk strangle.
Depending on how far OTM you buy the wings for an iron condor, it can act as a synthetic strangle. For example, if you sell a call and a put for $1 if premium each and buy wings for $.05 each, this is essentially a synthetic short strangle.
The cheaper the wings you buy, the more the iron condor will act as a short strangle.
Iron Condor vs. Iron Butterfly
An iron butterfly is a short straddle with wings, while an iron condor is a short strangle with wings.
A short straddle involves selling ATM options, while a short strangle involves selling OTM options.
Therefore, the iron butterfly is more neutral than an iron condor and has a tighter profit range. Additionally, you will benefit more from theta decay with an iron butterfly since the ATM options contain the most extrinsic value.
The iron condor and iron butterfly both benefit from volatility dropping, but the iron butterfly will benefit slightly more, given the stock doesn’t move too far from its range.
tastylive Iron Condor Mechanics | Key Takeaways
To recap, tastylive's approach to trading iron condors focuses on collecting adequate premium at entry, closing trades at 50% of max profit, and actively managing untested sides of the spread. By following these guidelines, traders can manage risk effectively and increase their probability of success.
As you embark on your journey with iron condors, remember that the HaiKhuu Trading community can guide you through anything you don’t understand. You can join the HaiKhuu Discord for free and consult with professional traders today!
Otherwise, we hope this article provided some guidance about improving your iron condor trading strategy!
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