Trading Iron Condors for Income Generation

Update 8/8/20

Since I’ve first published this article over a year ago, I’ve learned a couple best practices that I wanted to make sure got added to this post. It probably makes sense to read the entire article and then come back here to the top to finish it.

Lessons Learned

  1. When trading iron condors, you generally want to collect about 1/3 the width of the strikes of the spreads. For example, in the DIS example below, the strikes for each side were 2$ wide (105-107 and 116-118). That’s about $200, and a best practice for how much should be collected is about 1/3 the width, or at least 66$ on entry. In the example below, I collected 148$ so I can check that box.
  2. I’ve also learned to not mess with the structure of the trade once entering. If you enter it as an iron condor, exit it as an iron condor. In the article below I mentioned converting the iron condor into a vertical spread. You can certainly do that, but it changes the risk profile of the entire trade and you’re not as “insured” as you were should the stock whipsaw a 2nd time to the other extreme. Generally, just hold until 21 days to expiration, then close at a profit (or loss).
  3. I personally like to increase the probability of success now to higher than 66%. When I wrote the article, I entered the trade thinking 66% was good, I’m now a bit more choosy with the trades I enter and prefer to take trades that give me 80% chance of at least making 50% of the total possible profit. In the example below, I received $148, so I’d hope to exit when the value is $74.
  4. I should stress that even though iron condors are neutral positions, you need to find stocks that have a high IVR (Implied Volatility Rank) when entering the trade. Ideally, the IVR should decrease over time to help lower the value quickly so you can get out quickly for a profit.

Intro from February 2019

There are many option strategies to generate income. One of the more colorfully named strategies is known as the “Iron Condor”! What better name for something we talk about at The Money Vikings! The key element of options strategies is to marry the correct strategy with the right stock. Iron Condors are best used for neutral positions, where one doesn’t think the stock will make a major move to the upside or downside over a fixed period of time. It is called an “Iron Condor” due to the way the trade Profit and Loss is graphed on the chart. It appears to have two wings and an iron clad center where you want the stock to trade. Check out the fun cartoon Greg made and the chart below and you will get the point. Last week I entered into an Iron Condor with the Disney (DIS) stock, betting that the stock would remain somewhat rangebound between 107 and 116. Earnings had already passed and if it was going to have made a big move, it probably would have already. Even if not interested in Iron Condors with Disney stock, we also enjoy long term hold of Disney Dividend Stock!

Tasty Trades

This trade was suggested by the folks at Tastyworks, so I thought I would give it a shot. As illustrated in Greg’s cartoons, The Iron Condor gets its name from the shape of the Profit and Loss diagram, with the “wings” on each site. Therefore it is basically a bullish put spread combined with a bearish call spread.

Iron Condor Goals

When you enter the trade, you receive a credit, and your goal is to protect it. In the image below, the green flag is in the middle, and that’s where the trade starts. This trade has about 42 days until expiration, and anything can happen. This being the case, I knew going into the trade what my max risk was, and I also knew I had a 66% probability of making 50% of the max profit, which aren’t terrible odds if you ask me. I’m only shooting for 50% profit on the trade, not the full 100%. I have a Good Till Cancelled order to close it out as soon as it hits 50%. I might also decide to close it out sooner if the market environment changes, or something goes terribly wrong with the stock. Iron Condor Since opening the trade, DIS has declined a few bucks to 109, making the upper wings lower in value. I am considering selling that off so I’m left with a bullish put spread, and less barrier to how much I might make. This is just another example of how a person can get their assets to work harder for them and spin off additional side income. As always, all investing has risk. This is not advice for any individual, see a financial professional!  

10 thoughts on “Trading Iron Condors for Income Generation

  1. Your cartoons/graphics are incredible! This condor is my favorite.
    Congrats on the success of your blog too. You do a great job to make these topics digestible for everyone.

    1. Thank you so much Nate! I just bailed on a TSLA one that was about to beach the low end. (Wish I hadn’t.) Passed your artwork praise over to Greg!

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