The Complete Beginner’s Guide To The Iron Condor Option Strategy

Do you want an options trading strategy that is safe and generates a consistent income each month?

If so, then you want to trade the Iron Condor.

That’s because the Iron Condor is a defined-risk options strategy and has a high win rate as well.

So not only will you win often, but also you can’t blow up your account on any single trade.

So if you want to trade the Iron Condor, then there are certain important things you must take note of.

What Is The Iron Condor?

The Iron Condor is a neutral options trading strategy that aims to capture profits if the market stays within a certain range.

The image above shows the risk profile of the Iron Condor.

In essence, the Iron Condor simply is the combination of two Credit Spreads:

• Bull Put Spread (aka Short Put Spread)
• Bear Call Spread (aka Short Call Spread)

When you combine these two Credit Spreads together, what you get is an Iron Condor.

As you can see in the risk profile above, the Iron Condor has a large profit zone in the middle.

So as long as the market stays inside of this profit zone by expiration, the Iron Condor will be profitable.

Why Trade The Iron Condor?

There are a number of reasons why you should trade the Iron Condor, especially if you’re new to trading options.

Reason #1: High-Probability Strategy

The Iron Condor is a high-probability trading strategy.

While there are many different ways to construct the Iron Condor, generally the win rate is more than 65%.

That means that you will win more than half the time.

And this is important because if you choose a trading strategy that has a low win rate (i.e. debit spreads, butterfly, calendar spreads, etc.), then you will have a long losing streak.

The table above shows the probability of losing trades in a row within a 100 trade sequence.

So let’s say you decide to trade the butterfly with a win rate of 30%.

If you were to see the row where it shows the win rate of 30%, you will notice that the probability of having 8 losing trades in a row is 100%!

That means that sooner or later, you will face a losing streak of 8 losses in a row.

And there’s a 93% chance of 10 losses in a row!

Now, given that the butterfly could still be a profitable strategy in the long run, the problem is that not many traders are able to withstand that many losing trades in a row.

And this is especially so for new traders.

Many people would give up on the strategy well before they even hit the 8 losses in a row!

In fact, after 3 – 5 losses in a row, many people will start doubting the strategy and doubting their own analysis.

And they won’t be able to put on the next trade which could very well be a winner.

But if you were to trade a high-probability strategy like the Iron Condor, you will have a shorter losing streak.

If you take a look at the row with a 65% win rate, you will notice that there is only a 100% chance of 2 losing trades in a row.

And a 99% chance of 3 losing trades in a row.

That certainly beats having a 98% – 100% chance of 9 losing trades in a row!

So with the Iron Condor, it is a much easier trading strategy to stick with in the long run.

Reason #2: No Need To Pick A Direction

The beauty of the Iron Condor is that it is a market-neutral trading strategy.

That means it can profit regardless if the market goes up, down, or goes sideways, as long as it stays within the short strikes.

One of the biggest frustration of new traders is knowing which direction to pick.

If you were to just trade stocks without options, you’d have to either long or short the stock.

If you long the stock, the only way you can make money is if the market goes up.

And if you short the stock, the only way you can make money is if the market goes down.

But with options, more specifically with the Iron Condor, you can just put the Iron Condor and profit in either direction!

That is why the Iron Condor is much easier to trade compared to many other option strategies where you’re required to choose a direction to profit from.

Reason #3: Market Often Stays Within The Expected Move

When we are trading the Iron Condor, we are usually trading what’s called the “expected move”.

The expected move is the amount that a stock is expected to either go up or down from its current price in by a certain time based on its current level of implied volatility.

This is also the one standard deviation move of a stock, which represents a 68% probability that the market will stay within a certain range.

For example, if a stock is currently at $100 and the expected move for the next 45 days is $10, it means that there is a 68% probability that the stock will be within the range of $90 to $110 in the next 45 days.

So when we construct our Iron Condor, we usually choose our short strikes based on this expected move number.

And the reason we do this is because historical statistics have shown that the market tends to stay within this range longer than 68% of the time.

And that’s because the Implied Volatility more often than not overstates the Realized Volatility.

The table above shows a study done on Implied Volatility versus Realized Volatility by the good folks at TastyTrade.

You can see that theoretically, the market should only stay within the expected move 68% of the time.

But in actual fact, the market stayed within the expected move longer than it theoretically should.

You can see that the market stayed within the expected move 71% to 85% of the time.

Which means you win more often than you theoretically should.

And this is the edge we have as option sellers.

Here is another study done by the TastyTrade team on the SPY index ETF showing the expected move is greater than the realized move.

And this study also shows that the expected move is greater than the realized move regardless of what the Implied Volatility rank is.

So this is why the Iron Condor can be very profitable in the long run when you trade the expected move.

Reason #4: Profitable Over The Long Run

The above shows the long-term performance of the Iron Condor when closed at 21 days-to-expiration (DTE)  versus closing it at expiration.

In both cases, the Iron Condor is profitable.

However, the Iron Condor is more profitable when it’s closed at 21 DTE.

That’s because if you close it out at 21 DTE, you reduce your risk significantly compared to if you close it out at expiration.

So that means, if you want to trade the Iron Condor, you will see better results when you exit your trade at 21 DTE.

How To Trade The Iron Condor

So now that we know that the Iron Condor is a very powerful and profitable strategy, how do we structure it?

Here are the trade mechanics of the Iron Condor:

• Choose the expiration date that’s around 45 – 60 DTE.
• Select your short strikes around the expected move or the 16 delta options.
• If you’re just starting out, your long strike (aka wings) should be around $5 – $10 wide.
• If you’re more advanced, you can have dynamic wings based on delta (i.e. long strikes at 5 deltas).
• Allocate no more than 5% – 7% of your capital on any single trade.
• Trade management methods:
  • Take profit at 50%.
  • Exit at 21 DTE regardless of a win or loss.
  • Take profit at 50% or exit at 21 DTE, whichever comes first.