Condors

IRON CONDOR

This is a popular and successful strategy and has high probability and a balanced risk-reward outlook. This conservative, non-directional technique is attractive if INDEX trades within a well defined range.

We use this strategy very effectively when market is channeling.

The equity-based index Iron Condor strategy has higher probability of being profitable because "the market is in a trading range over 80% of the time." a matter of recognizing the vertical limits of the current price pattern, then initiating each portion of the position in a timely manner. But there is a risk that 20% of the time it may trade out of the range. The range is defined by the support and resistance points.

How this risk is managed?

1) Theoretically, a few adjustments are necessary in trending markets. One method is to roll up the spread if the market goes up cutting through resistance levels. On the other hand if the market falls below the support level, roll down the position. Another way to look at the adjustments is to scale in. During periods of unexpected activity, the occasional volatility spikes can often be exploited (by opening each of the credit-spreads individually) with a very high probability of a successful outcome.

More adjustments are possible if you understand Greeks.

2) Apply the margin of safety concept. Open the spreads away from the resistance and support levels. This is recommended for beginners as the adjustments require lot of trading experience.

Example

Iron Condor - INDEX (e.g. Nifty)
Sell 500 5200 Oct. INDEX puts for 68
Buy 500 4800 Oct. INDEX puts for 9
Approx. Spread Credit: 59 (or 29,500)
Sell 500 5700 Oct. INDEX calls for 70
Buy 500 6100 Oct. INDEX calls for 10
Approx. Spread Credit: 60 (or 30,000)

Total (combined) credit = 119
Maximum potential profit = 59,500

If you wish to know more about equity options, just send an email to optionstraining2012@yahoo.com