What Is an Iron Condor Options Trade?

Hearing phrases like "iron condor options trade" might be intimidating at first. But it's really just a fancy name for another simple options trading strategy.

An iron condor is an options strategy that pays you if the underlying stock does absolutely nothing. And if the stock does happen to start moving in either direction, the iron condor trade limits your risk.

Today, we're going to show you how an iron condor works, then how to execute it. We even have an image that might help you out.

It's true, an iron condor is not your basic entry-level options play. It's not necessarily a strategy for beginner options traders. But even so, it is fairly straightforward once you know how it works.

In options trading, you can profit whether your stock goes up or goes down. Sometimes, you don't even have to pick the direction to make money. And sometimes, you can make money if the stock does not go anywhere. That is what we will attempt with an iron condor.

You may be familiar with options spreads, such as a bullish put spread or a bearish call spread. Each of these involves two options with the same expiration date but different strike prices.

Since you sell the more expensive of the two options, and buy the less expensive, you start the trade with a net credit deposited in your account. If the trade works to your expectation, you keep the full amount of the credit when the options expire.

The bullish spread hopes the stock will go up in price, and the bearish spread hopes it will go down. By combining them together, the net result is that you want the stock to stay put so all options expire worthless - and you keep all the money.

Here's a how you can start executing an iron condor trade. There's also a graphic to simplify things a bit more...

Building an Iron Condor

[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]

You will need to trade four options on one underlying stock, all with the same expiration date. Each will have a different strike price.

Buy a put with the lowest strike price, and sell a put with the next lowest. At the same time, you sell a call with the third strike price and buy a call with the highest strike price.

Strike prices should be spaced evenly, and the price of the underlying stock should be somewhere between the middle two strike prices. If the stock price ends up between the middle two strike prices at expiration, all options will expire worthless. You keep the net credit in your account.

Here's what the profit and loss looks like:

The underlying stock price should be in between X and Y. If successful, your max profit is the credit you collected at the start of the trade. Your max loss is the difference in strike W and X, minus the credit you collected.

This is a solid, conservative play where the risk is defined but the reward is known.

And anyone can do it. Don't let the jargon keep you from profit opportunities.

Your Blueprint to Achieving Financial Freedom: America's No. 1 Pattern Trader is going live on camera to show readers how they can collect a series of take-it-to-the-bank Payday Appointments. With this fast money move, you could be making $4,238. Click here to learn more...

Follow Money Morning onFacebook and Twitter.