Learn With ETMarkets - Options Demystified 506 – Iron Condor
option strategies, explaining Tara the concepts of Strangles and Short Strangles. She also pointed out a significant drawback of short strangles, where a trader is exposed to unlimited risk, and a substantial directional market move can seriously dent their trading capital.
To address this concern, Maya suggested two alternative approaches to Tara: using stop-loss orders or transforming both sold options into credit spreads by purchasing far out-of-the-money (OTM) options.
This transformation turns the short strangle into a well-known strategy known as Iron Condor.
Iron Condor:
Tara, intrigued by the idea, asked Maya to elaborate on the Iron Condor and its popularity. Maya, appreciating Tara's enthusiasm for exploring new trading strategies, gladly obliged.
She explained, «The Iron Condor is a versatile options trading strategy known for its popularity among traders looking to limit risk and generate consistent income. It's a valuable tool in an investor's toolkit.»
«But why is it so popular?» Tara inquired further.
Maya replied with a smile. «The Iron Condor gains its popularity for several reasons.
Firstly, it allows traders to profit in neutral or range-bound markets, which is a common market scenario. In other words, it's effective when you believe that the underlying asset will stay within a certain price range.»
Tara was eager to grasp the concept and asked, «Could you explain it in more detail, Maya?»
«Sure, let me illustrate with an example,» Maya began. «The Nifty October futures are currently trading around the 19950 level.
Suppose you anticipate a sideways market for the next two months, with Nifty expected to remain range-bound. In this scenario, you can create an Iron Condor. Here's how it works: First, you
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