How To Short Iron Condors (My $1,000/week strategy)
Making $1,000 per week is possible with a free trade from shorting iron condors. This strategy can be used to produce income in any market environment and offers traders the opportunity to profit whether the market is trending up or down. In this blog post, we will discuss what iron condors are and how you can short this trading strategy to produce income regardless of market direction.
What is a Short Iron Condor?
A short iron condor strategy is a type of options strategy that involves selling two vertical spreads. The goal is to generate income from the premiums collected and to limit the potential loss on the trade. Inside, this blog we are going to explain how finding the right options can lead to a totally free trade.
The goal of the trade is to have the current stock price trade sideways and take advantage of the options decay. This will happen faster as implied volatility drops and time passes. So it is important to find options with higher than normal implied volatility. In order to bring in theoretically $1,000 a week, this is a must!
The Short Iron Condor Basics
At this point, it is important to clear up how a short iron condor is formed. These two parts are the put and call credit spread with the same expiration date. These two parts lower the risk in the trade and increase the reward. This is mainly due to the fact that an iron condor most likely will not be assigned on both short legs.
While there is always a chance short legs can be assigned, the chance of both being assigned is extremely small because of the fact that only one can be in the money at once if the trade is set up correctly. This would require the short legs to be far enough apart that the price wouldn't be close to both at the time of expiration.
Implied Volatility Requirements
Implied volatility is the most important metric to finding these possible "free trades". This is related to how volatile the current stock price is and how much it moves. If implied volatility is over 100, this gives the chance for free trade.
It is important to take into account the volume and open interest as that can decrease the ability to profit from the trade due to the inability to get filled at a decent price. The money lost from getting in and out can really add up if these factors are not reasonable.
So before getting into this position is important to have these three factors at all times:
- Implied volatility over 100%
- Volume over 50-100 contracts per day
- Open Interest over 100-500 contracts
As you can below, the one option meets the criteria above delivering around 100% implied volatility, volume over 50, and open interest over 100. These numbers will need to be greatly adjusted for larger accounts as they will need more options to get filled.
Put Credit Spread Requirements
In the example below, you can see a bull put credit spread was created. By selling the $63.5 strike price and buying the $62.5 strike price call, we are able to receive a net premium as the time value decays from the spread. This will only happen if the price of the underlying stock price stays above the breakeven price of $63.5 at the time of expiration.
The max profit is calculated by the difference in the contract premiums, which happens to be $48 for the net credit received. The max loss is calculated subtracted from the credit received by the difference in the strike prices. This happens to be $52.
This trade meets the criteria of a possible free trade because one leg of the short iron condor delivers a 1 to 1 risk to reward. In the example, below we are basically risking $50 to make $50. This seems like a terrible risk to reward but by creating a full short iron condor we can put this trade on while risking no money at all.
This is the ONE requirement of one leg of the credit spread, it is important to deliver a 1 to 1 risk to reward. Once we have this, we can then check the other credit spread to see if we can find similar risk to reward for the free trade.
Call Credit Spread Requirements
In the example below, you can see a bear call credit spread was created. By selling the $64 strike price and buying the $65 strike price call, we are able to receive a net premium as the time value decays from the spread. This will only happen if the price of the underlying stock stays below the breakeven price of $64 at the time of expiration.
The max profit is calculated by the difference in the contract premiums, which happens to be $45 for the net credit received. The max loss is calculated subtracted from the credit received by the difference in the strike prices. This happens to be $55.
This trade meets the criteria of a possible free trade because one leg of the short iron condor delivers around a 1 to 1 risk to reward. In the example, below we are basically risking $50 to make $50.
The key is when we combine the put and call credit spread into one trade that is where the magic happens. This is because the credit is added together $50+$50, and the risk in the trade decreases by the new credit spread potential profit $50-$50.
Iron Condor Maximum Profit and Risk
The example below will show the exact numbers for the trade being put on in terms of the risk, reward, breakeven points, and more.
Maximum profit: The maximum profit potential increases to $93 because of having two credit spreads.
Maximum Loss: The maximum loss actually decreases because it is the potential profit minus the difference in only strike prices for only ONE credit spread (so $64 strike price -65 strike price -$0.92 net credit = -$8). While this trade technically is not free, if this stock price moves $0.10 up or down it could make this a free trade quickly. The strategy as a whole is still valuable and over time this could be really beneficial to accounts.
Break-even High Price: The breakeven price for when the bear call credit spreads start to get breached is $64.92.
Maximum Profit High Price: The highest price that can be touched before the profit decreases is $64.00.
Break-even Low Price: The breakeven price for when the bull put credit spreads start to get breached is $62.58.
Maximum Profit High Price: The lowest price that can be touched before the profit decreases is $63.00.
You can see in the example below, this is a very neutral position on the stock and the goal is for the stock price to trade sideways or expire between the short legs of the put and call credit spreads. The exact price of this would be between $63-64, so while the volatility allows for the potential of free trades the fact that the stock price is volatile makes it very hard to nail a particular price range. The max loss will be realized if we have a large move in any direction and we pass the breakeven prices.
This is the one caveat of the strategy, it has a very low chance of achieving maximum profit but that doesn't change the fact that it is a free possible trade!
How to Find Options with a Higher Chance of Profit
The option chain will allow traders to see the chance for profit for any option. This should give a good idea of the risk tolerance as well as the chance of achieving max profit for the iron condor.
As we can see below, the put credit spread starts by selling an option at the money with a 64% chance of profit. This might be very low to many traders' standards and while the trade could be free, it may need to be adjusted or avoided. At the end of the day, the percentage of success should be adjusted and tweaked based on the strategies of the trader. For example, some traders will only trade stocks with a 60, 70, or 80% chance of profit. Which will stop them from taking any of these possible "free trade opportunities."
How to maximize this strategy
It's important not to choose iron condors at the extreme ends of the trading range. A lot of iron condor traders will buy iron condors with strikes that are far out from each other, so it can be difficult to make a profit during any one day
This is because we don't want our iron butterfly position's delta (the exposure) to change too much. If the underlying asset moves in the wrong direction, we could end up with a large loss on our trade
When trading iron condors, it's also important to keep an eye on the implied volatility of the options you're selling. Volatility can increase or decrease over time, so you'll want to make sure that your premiums are still profitable when it changes.
NOTE: iron condors work best in a sideways market, not during times of high volatility or extreme bullishness/bearishness.
Another important thing to note is that iron condor traders should be aware of the commissions they're paying for each trade, as well as any other fees associated with their brokerage account.
Tips for Trading Iron Condors
- When trading iron condors, always use a stop-loss order to protect your downside.
- Make sure that you're comfortable with the risk/reward profile of the trade before entering into it.
- Don't choose iron condors at the extreme ends of the trading range.
How to Make $1,000 a Week
The key to this strategy is to utilize the weekly options as they decay the fastest giving the best risk to reward. For the example above, this gives the possibility of making $100 for one short iron condor. So in order to make $1,000 we would need to sell 10 iron condors a week and have them perfectly expire worthless between the short strike prices to make the maximum profit.
While this can be very hard to achieve it is still possible while keeping the maximum risk at theoretically zero. At the end of the day, this is a good strategy to bring limited risk and lower the significant risk of options.
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