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Iron Condor Spread

The (Short) Iron Condor Spread is my all-time favorite spread when I think the market will trade within a fairly small range for the near future.  It is a little complicated, but worth the effort to learn.

With a name like this, it's got to be a great spread.  I know what a condor is, but I wouldn't recognize a short one if I saw it, and I've never seen an iron one - all the condors I know have feathers.

If you really want to impress your friends, you can tell them you own a Short Iron Condor Spread, or wow them even more by saying you also are long a strangle and short another strangle which is more in the money. Or you can say you have a bear call spread and a bull put spread, or else a short vertical call spread and a short vertical put spread.  They all mean the same thing, but who really cares what they call them?

The Iron Condor spread involves the simultaneous purchase of a put and a call for the same expiration month (usually only one or two months of remaining life), and the sale of a put and call for that same month but at a strike price which is closer the to current stock price than the options you purchased.

The result is that you end up with two vertical spreads, one of which uses calls at the higher strikes (called a bear call spread) and puts at the lower strikes (called a bull put spread) with all positions in the same expiration month. The number of call spreads is equal to the number of put spreads, and the increment between the strike prices is the same for both spreads.

Typically, an iron condor spread is sold rather than bought (so it should really be called a short iron condor spread).  Since both the puts and calls which are sold have a higher value than those being purchased, it is a credit spread.  It is placed when the investor believes the underlying stock will end up inside of a certain range of prices.  If it does, all four options will expire worthless and the investor will pocket the original credit she received when originally placing the spread.

The iron condor is so named due to the shape of the profit/loss graph, which loosely resembles a large-bodied bird.  In keeping with this analogy, traders often refer to the inner (short) options collectively as the "body" and the outer (long) options as the "wings".

The word Iron is used (for no apparent reason that I have been able to find) to describe a spread where one part of the overall position is a spread at strike prices above the current price of the underlying stock and the other part of the overall position is at strikes below the current price of the stock.  An iron butterfly is another example of using iron in this manner.

Six reasons to love Short Iron Condor Spreads:

  1.     The stock can go up, down, or stay flat, and you can still make a profit.
  2.     Exceptional profits are possible every month
  3.     Extreme flexibility is possible in creating a comfortable risk level
  4.     You can precisely determine your maximum potential loss (or gain) before you make the investment
  5.     If the stock closes anywhere in a broad range at expiration, a guaranteed pre-determined profit is made
  6.     You only have to wait a maximum of 30 or 60 days to learn how much you have made or lost.

One reason not to like Short Iron Condor Spreads:

  1. You can lose your entire investment in less than 60 days.

For this reason, the best way to carry out the iron condor strategy is to be willing to take a small loss at times because it eliminates the possibility of incurring a larger loss, and only investing a portion of  your capital at one time.  Theoretically, if you only risk half your capital at one time, you will never run out of money to invest.


Terry's Tips Stock Options Trading Blog

March 18, 2018

Nvidia (NVDA) Is on the Verge of a Big Breakout

This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies.  We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.  The Terry’s Tips portfolio that trades these spreads in an actual account for subscribers to follow on their own or have trades made for them in their account through the free Auto-Trade service offered by thinkorswim has gained 79% so far in 2018.


Nvidia (NVDA) Is on the Verge of a Big Breakout

Several analysts have an optimistic outlook towards NVDA despite the stock trading near some important resistance.  Here are two of them – Things Are Going Right for NVIDIA and AMD and Semiconductor Stocks Soar to Highest Level in Decades Despite Deal Woes.

March 12, 2018

Will Paypal (PYPL) Continue Its Upward Momentum?

This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies.  We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum. The actual portfolio at Terry’s Tips where we place the trades we tell you about a couple of days later is now ahead 84% so far in 2018, and that includes our closing out the BABA spread last week at a slight loss when we could have made the max gain if we had waited three more days until expiration.  Even we make bad trades once in a while (although we still believe we made the prudent move – no one could have predicted that BABA would soar $11 in the last three days before expiration).


Will Paypal (PYPL) Continue Its Upward Momentum?

Several articles have recently been published on the positive outlook for PYPL.  Here are two of them – Paypal Holdings Stock Is Itching for a Breakout and BMO Capital Markets Boosts Paypal Price Target to $89.00.

March 5, 2018

TD Ameritrade (AMTD): A Stable and Consistent Player

This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies.  We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.


TD Ameritrade (AMTD): A Stable and Consistent Player

Several analysts have a bullish outlook for TD Ameritrade, here are two of them: TD Ameritrade Rating Reiterated by Goldman Sachs Group and TD Ameritrade PT Raised to $61.00

AMTD faced some volatile price action in February as the global equity markets fell under pressure and broadly corrected lower.  In the past week, AMTD broke to a fresh 19 year high prior to pulling back.  The bullish break is suggesting the stock has resumed higher within its broader uptrend while the pullback offers an entry point against support from the 20-period daily moving average.

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This Chicago brokerage firm with the unlikely name thinkorswim, Inc. by TD Ameritrade is considered by many to be the best option-friendly broker. For openers, they have extremely good analytic software and their option trading platform is exceptional. Thinkorswim Mobile has been called the best mobile app in the industry. In 2017, TD Ameritrade received 4 stars out of 5 in the annual Barron`s* Best Online Brokers Survey. TD Ameritrade was tops as an online broker for long-term investors and for novices. The company is the only broker that receives the highest 5.0 score for research amenities among all firms participated in the ranking last year.

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