Iron Condors have become a very popular conservative investment strategy because a properly implemented Iron Condor strategy can produce reliable income each month. Iron Condors, and credit spreads in general, do not require that you spend hours in front of the computer “watching” them.
Still, this is not a “set and forget” technique. As with any serious investment approach, you will need to establish an objective set of trade entry criteria, and – importantly – operate with an equally rigorous predetermined risk management plan.
Iron Condors Are Comprised of Two Option Credit Spreads in the Same Underlying Stock, ETF or Index
An Iron Condor can produce twice the rate of return of two non-related credit spreads. This is because an option-friendly brokerage firm will only require a single margin deposit to support both credit spreads of an Iron Condor. This doubles the rate of return potential compared to two unrelated credit spreads, but it is critical that both credit spreads of your Iron Condor independently conform to your trade entry criteria.
Entry Criteria Can Vary Depending Upon Underlying Investment Instrument
For example, the distance your Iron Condor option credit spread are from the underlying stock, ETF, or Index is a critical component of your trade entry criteria. That distance should be greater for stock-based Iron Condors because stocks tend to move more vigorously than “baskets” like Indexes and many ETFs. Consequently, even though stock-based Iron Condors typically generate more premium income than the other categories, they do so because they tend to involve greater volatility.
Risk Management Needed
Although a properly implemented Iron Condor strategy is a quite conservative use of options, an Iron Condor is not risk-free. Accordingly, the investor should also have a completely objective (no hunches or “hoping” allowed!) predetermined plan of action for exiting from, or adjusting, credit spread and Iron Condor trades that move against him. These risk control actions must be activated when the potential loss is relatively small. Successful investors – no matter what the investment vehicle – ferociously guard against the possibility of a large losing trade wiping out all the previous trading profits.