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 November 16th:
As you can see, the scanner shows some interesting Iron Condor trades on stocks such as LLY, MSFT, SMCI, TSLA, NVDA and META. 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 Tesla.
Using the December 1st expiry, the trade would involve selling the $220 put and buying the $175 put. Then on the calls, selling the $265 call and buying the $310 call.
The price for the condor is $4.03 which means the trader would receive $403 into their account. The maximum risk is $4,097 for a total profit potential of 9.84% with a probability of 75.2%.
The profit zone ranges between $215.97 and $269.03. This can be calculated by taking the short strikes and adding or subtracting the premium received.
The Barchart Technical Opinion rating is a 16% Buy with a weakest short term outlook on maintaining the current direction.
TSLA is showing an IV Percentile of 10% and an IV Rank of 6.14%. The current level of implied volatility is 45.95% compared to a 52-week high of 95.99% and a low of 42.67%.
The next Iron Condor we will look at is on Amazon (AMZN), this time for the December 15th expiration.
This example involves selling the $130 put and buying the $110 put, then selling the $150 call and buying the $170 call.
The maximum profit potential is $227 with maximum risk of $1,773. The total profit zone ranges between $127.73 and $152.27.
The Barchart Technical Opinion rating is a 100% Buy with an average short term outlook on maintaining the current direction.
AMZN is showing an IV Percentile of 8% and an IV Rank of 6.07%. The current level of implied volatility is 26.66% compared to a 52-week high of 54.49% and a low of 24.87%.
Mitigating Risk
Thankfully, iron condors are risk defined trades, so they have some build in risk management. The most the TSLA example can lose is $4,097 while the AMZN condor has risk of $1,773.
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.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
