An Iron Condor is an advanced options trading strategy designed to profit from a stock or index expected to have low volatility. It involves four different options contracts: two call options and two put options, all with the same expiration date but different strike prices.
Here’s how it works:
- Sell an out-of-the-money call option
- Buy a further out-of-the-money call option
- Sell an out-of-the-money put option
- Buy a further out-of-the-money put option
Essentially, the Iron Condor creates a “range” (between the two options you sold) where the stock or index price can move without causing a loss. The goal is for the price to remain within this range through the options’ expiration date. You profit from the premium collected by selling the options.
It’s important to note that potential losses on an Iron Condor can be more significant than potential profits. Risk is limited by the out-of-the-money options you buy, but losses can still occur if the price moves significantly. Therefore, the strategy requires careful risk management.