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There are many benefits to trading options over stocks

One of them is versatility. 

You can structure a trade to be neutral, bearish, bullish, and everything else in between. 

Today I want to talk to you about how I used options to trade AMZN.

I turned a loser into a winner and then boosted my profits just using this simple technique

And instead of just taking a loss on the trade, I dug deep and found the courage to adjust my trade and increased my profits.  

Ready to learn more about how to boost your returns using this strategy?

 

The Strategy


There are many different strategies you can select from when trading options, from basic calls at puts, and calendar spreads to broken wing butterflies, the possibilities are endless.

And if you are not happy with the selection, feel free to create your own!

I’ve had to come up with wild strategies when the markets get tricky.  And most recently in March during the market collapse I had to bull a few tricks out of my hat.

One strategy that I save for special occasions is called the Iron Condor and I typically use it when I need to be strategic with my trade

An iron condor is an options strategy created with four options…two puts (one long and one short) and two calls (one long and one short).  

This strategy uses four strike prices, all with the same expiration date. The goal is to profit from low volatility in the underlying asset.

An iron condor is essentially just the combination of a bull put spread and a bear call spread.  

And since each spread of the iron condor is a net credit, this trade is considered to be a net credit and you are paid up front for this position.

The goal is that the underlying doesn’t move much around the strikes you selected, and then the options expire worthless.  

And when the stock didn’t move this would allow you to keep the money you earned from the iron condor position.

 

What’s an Iron Condor?


It sounds fancy but it is actually very simple.  An Iron Condor is really a combination of two basic option spreads.  

An Iron Condor is created by combining an out-of-the-money (OTM) short put spread (bullish strategy) with an OTM short call spread (bearish strategy).  

It is important that you are using options that expire on the same date.

By selling two different OTM vertical spreads, you will collect the premiums from both sides of the trade.  

 

There are two outcomes possible:

  1. If you are wrong? The profits from one spread will offset the loss on the other, and you have limited losses 
  2. If you are right?  You can ring the register on double the profits!

 

The Iron Condor – Risk Profile


Let’s take a look at an example risk profile for an Iron Condor.

Source: Thinkorswim

 

This might look a little strange at first glance, but it is actually very simple.

There is a familiar Credit Call Spread (on the right) and a Credit Put Spread (on the right).  Both of these traded at the same time create the 2x profits in the middle.

Now first let’s separate the two trades and look at the risk profile on them as they might look more familiar.

 

The Credit Call Spread Risk Profile :

Source: Thinkorswim

 

The risk profile of this spread is:

Max Profit : $2,000

Max Loss : $4,000

Breakeven : $3560

 

The Credit Put Spread Risk Profile :

Source: Thinkorswim

 

The risk profile of this spread is:

Max Profit : $2,000

Max Loss : $4,000

Breakeven : $3179

 

Iron Condor Risk Profile :

Source: Thinkorswim

 

Max Profit : $4,000

Max Loss : $2,000

So as you can see, by simply utilizing a Iron Condor trading strategy instead of a single credit put spread or credit call spread, you are able to double your profits and reduce your risk by half.

 

When To Utilize The Iron Condor


Now that you know what the Iron Condor is, it’s probably time to understand when to use it.

If you think the market will stay within a range and you have no directional bias, maybe using an iron condor to bring in additional premium without increasing your dollar risk.

Use an Iron Condor when :

  1. Implied Volatility (IV) is high and you expect the IV levels to drop and the stock to be range bound for a period of time
  2. To add 2x the profits to a current profitable trade

 

Wrapping up


Now if you are in the mood for a limited risk / limited profit trading strategy, the
one strategy that is hard to beat is the Iron Condor.

But not only is it great for adding profits in a range bound market,  it can be used as a lifeline to rescue a losing trade and turning it into a winner.

From risk mitigation to capitalizing on sideways markets, there is little that the Iron Condor can’t do that you will need to know

Now to get the iron condor to work for you …

Click here to sign up for Options Profit Planner today

Author: Dave Lukas

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