A short iron condor is an income strategy that aims to profit when a stock stays within a specified range over the course of the trade. The trade is composed of four options with the same expiration:
- A long put far out of the money
- A short put closer to the money
- A long call far out of the money
- A short call closer to the money
The maximum profit is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.
Traders should have a neutral outlook on the stock and ideally look to enter when the stock has a high implied volatility rank.
Let’s take a look at Barchart’s Short Iron Condor Screener for August 15th:
As you can see, the scanner shows some interesting Iron Condor trades on stocks such as FSLR, NVDA, XOM, TXN, MU, AMD, AMZN and NVDA. Some of the results are very short-term trades and may not be suitable for all traders.
Let’s adjust the scanner to make sure we are only looking for iron condor trades with between 15 and 60 days to expiry. This scan gives us the following results:
Let’s look at the first line item – an iron condor on Texas Instruments.
Using the September 15 expiry, the trade would involve selling the $170 put and buying the $160 put. Then on the calls, selling the $180 call and buying the $190 call.
The price for the condor is $3.75 which means the trader would receive $375 into their account. The maximum risk is $625 for a total profit potential of 60% with a probability of 51.%.
The profit zone ranges between $166.25 and $183.75. This can be calculated by taking the short strikes and adding or subtracting the premium received.
The Barchart Technical Opinion rating is an 8% Sell with a weakest short term outlook on maintaining the current direction.
TXN is showing an IV Percentile of 12% and an IV Rank of 11.47%. The current level of implied volatility is 23.95% compared to a 52-week high of 43.89% and a low of 21.37%.
The next Iron Condor we will look at is on General Electric (GE) also for the September 15th expiration.
The GE condor has a higher maximum profit in percentage terms at 87.27%. This example involves selling the $115 put and buying the $110 put, then selling the $120 call and buying the $125 call.
The maximum profit potential is $233 with maximum risk of $267. The total profit zone ranges between $112.67 and $122.33.
The Barchart Technical Opinion rating is a 100% Buy with a strengthening short term outlook on maintaining the current direction.
GE is showing an IV Percentile of 3% and an IV Rank of 5.94%. The current level of implied volatility is 22.27% compared to a 52-week high of 48.89% and a low of 20.59%.
Mitigating Risk
Thankfully, iron condors are risk defined trades, so they have some build in risk management. The most the TXN example can lose is $625 while the GE condor has risk of $267.
For each trade consider setting a stop loss of 25-30% of the max loss.
Iron condors can also contain early assignment risk, so be mindful of that if the stock breaks through the short strike and it’s getting close to expiry.
Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
