An iron condor is a strategy that sells a put option and a call option at different strike prices while also buying a put option and a call option at different strike prices. The strike prices of the options sold are typically lower than the prices of the options bought, resulting in a net credit received when entering the trade.
For an iron condor trade, the maximum profit potential equals the net credit received when entering the trade. Moreover, the maximum loss potential is limited to the difference between the strike price of the options sold and the strike price of the options bought, less the net credit received.
Why use iron condors in Singapore?
Iron condors are a great way to generate income
One of the main reasons why traders use iron condors is to generate income. By selling options, you are collecting the premium paid by the option buyer. If the underlying asset’s price remains within a specific range, both options will expire worthlessly, and you will keep the entire premium as profit.
Iron condors allow you to trade with limited risk
Another reason to trade iron condors is that they offer limited risk. Unlike other option strategies such as buying call or put options, which have unlimited risk, the maximum loss when trading an iron condor is known in advance, making it an excellent strategy for those who want to limit their downside risk.
Traders can use iron condors in various market conditions
Traders can use iron condors in both bull and bear markets. In a bull market, you would look to sell call options and buy put options. In a bear market, you reverse and sell put options and buy call options.
Iron condors are easy to trade
Iron condors are relatively easy to trade compared to other options strategies because you only trade two options instead of four. Also, since you are selling options, you do not have to worry about timing the market perfectly. You will make a profit if the underlying asset’s price remains within the range of the two strike prices.
How to trade an iron condor
Select the underlying asset
The first step is selecting the underlying asset you want to trade, which can be any asset, such as a stock, index, or currency pair. For this example, we will use the S&P 500 index.
Choose the expiration date
The next step is to choose the options’ expiration date, which is the date on which the options will expire and must be before the underlying asset’s expiration date.
Select the strike prices
The next step is to select the strike prices of the options. The call option’s strike price must be above the underlying asset’s current price, and the put option’s strike price must be below the current price. For this example, we will use a strike price of 2200 for the call option and a strike price of 1800 for the put option.
Calculate the premium
The next step is to calculate the premium of each option, which is the amount you will receive when you sell an option and is calculated by subtracting the intrinsic value from the total value.
For this example, we’ll use a premium of SGD50 for the call option and SGD30 for the put option.
Enter the trade
After collecting all the information, you can enter the trade. You will need to sell one call option, and one put option at the selected strike prices. You will also need to buy one call option, and one put option at different strike prices.
For this example, we will sell one call option at a strike price of 2200 and one put option at a strike price of 1800. We will also buy one call option at a strike price of 2100 and one put option at a strike price of 1700.
Monitor the trade
The last step is to monitor the trade. You will need to check the underlying asset’s price regularly to see how it performs. If the price remains within the range of the two strike prices, then your trade will be a success. Otherwise, you may need to adjust your position.
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