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Short Strangle strategy involves
selling OTM short call and put. Profit will occur if the underline stock
traded within the range that we pick. Iron Condor is a
safer version of the Short Strangle strategy. Instead of
selling short call and put, we sell vertical calls and puts. Iron
Condor limits our risk but it also limits our gain. Please
remember in option trading, if we want a safer margin, we have to give up
part of the profit in exchange.
Let’s say we see an established trading range of $30 and $50 of an
underline stock and we want to trade iron condor strategy for this stock.
Leg one: Sell 50/55 vertical calls.
Leg two: Sell 25/30 vertical puts.
This is a neutral strategy. As long as the underline stock stays
within the range by option expiration day, our positions will expire
worthless and we collect the maximum profit which is the net credit
collected from selling vertical calls and puts.
Please notice in this example, the short call strike price is at
$50 resistance level and the short put strike price is at $30 support
level. We strategically pick these levels so the underline stock will
have a better percentage of staying within the range between $30 and $50.
Aggressive traders will pick narrower range which yields more profit but
involves more risk. Conservative traders will pick wider range which
yields lesser profit but involves less risk.
Notice: This Iron Condor strategy is simply a combination of selling vertical
calls and puts.
Personal notes: When trading iron condor before earning
report, my main focus is finding short call and put strike prices with
85% to 95% chance of staying out-of-the-money. I usually trade it the day
before earning report. If I trade this strategy after earning report, I
pick my short strike prices based on established range with strong
support and resistance.
Dennis Phan 潘家墉
10 December 2012
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