“The Iron Condor is a risky trade!”
This comment was shared today during my appearance on the Morning Show with JC and Strazza.
We were discussing this trade in $TSLA we put on yesterday.
Sure, this trade might have some risk in it.
Newsflash: ALL trades have risk. If there was no risk, there would be no potential reward!
An Iron Condor is a four-legged options spread consisting of equal amounts of short out–of-the-money puts and calls, and long further out-of-the-money puts and calls that protect the position and define the risk.
Here’s the PnL Graph for the $TSLA trade and this is a pretty common structure for an Iron Condor trade:
This spread is put on for a net credit which represents the most we can profit if held to expiration and all options expire worthless. This is achieved if $TSLA’s closing price on expiration day is higher than the short put strike and lower than the short call strike.
Meanwhile, the most we can lose is the distance between the short option and the long option less the credit we received at trade initiation. In this example above, the distance between the short strike and the long strike is $10.00. We collected a $3.10 net credit when we put the trade on. So 10 – 3.10 = $6.90. That’s the most we can lose.
$TSLA can go to zero or $1000 overnight. No matter to us, since the most we can lose is $6.90.
There is risk in this trade, sure. But is this any more risky than any other type of trade?
Is it more risky than buying 100 shares of $TSLA stock and having it gap down $25 points on me the next day, blowing through my stop?
Of course not.
Defined risk positions are a superpower somewhat unique to long options and certain options spread positions, like Iron Condors. I like to leverage this to my advantage as often as possible.
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