"Bread & Butter" Iron Condor Rules, POPs and Visuals

Kal Zurn
A free video tutorial from Kal Zurn
Option Trader | Founder of "Option Trading for Rookies"
4.7 instructor rating • 7 courses • 54,155 students

Lecture description

We start with the most widely used Iron Condor and its rules.

Learn more from the full course

Options Trading for Rookies: Advanced Iron Condor Strategies

Learn to trade multiple variations of Iron Condors option trading: the six winning Iron Condor option strategies

01:31:06 of on-demand video • Updated September 2020

  • Understand the basic concepts of iron condor options (what they are and how they work)
  • Learn and trade all the different variations of iron condors
  • Increase your profit potential and risk levels using iron condors
  • Learn new ways to make money in the stock market
English [Auto] So now that hopefully have a rough idea of what an iron condor is and our basic rules for setting them up, let's get into our first Iron Condor. And this is our bread and butter Iron Condor, because this is the one we're going to use more than any other one. This is called one third, the width of the strikes, iron condors. And I'm going to list the rules at the beginning of every section are going to give you the visuals and obviously how to set them up. So we'll start with the rules, even if they don't make sense. Don't worry. I'm going to explain them moving forward. So no one rule when we're doing iron condors is we always prefer to have a minimum two dollar with on each vertical because of commission costs. Trading costs money. They charge you every time you buy or sell something. So if you only do a one dollar wide condor because you're actually selling two verticals at the same time, you have two sets of commission costs when you open it and to sit on the commission costs when you close it verticals on both sides. So that gets expensive. A dollar wide Iron Condor is just not going to be able to make enough money to cover those costs. So we always prefer to start with at least two dollars with on each vertical of the Iron Condor. Then a rule. What are we looking for? We're looking to receive anywhere from 30 to 40 cents credit per dollar with strikes. Don't worry, I'll explain this, which means because we're starting out with the two dollar with minimum, you're just going to double those numbers and it's going to be between 66 and 80 cents. Total credit received if we do a two dollar wide iron condor. The way we manage this thing is we're going to manage this at twenty five to fifty percent of the max winner. Again, don't worry, I'll explain this moving forward. And again, when to use this, we can use this any time. This is going to be our bread and butter iron condor. This is our fallback if we're trying to figure out what we want to do and we don't know which are in Canada use or don't have a preference. This is our fallback every single time. The one third with of the strikes, Iron Condor is our bread and butter Iron Condor. So here's what one third with the strikes looks like and this chart here, I want you to be aware this is a pop chart, not a dollar chart. And what I mean by that is all I'm telling you is what's my probability of profit? Remember, what's my chance of making at least a dollar profit on this trade? So when I do a one third with the strikes Iron Condor, what that means is I have a sixty eight roughly. Obviously it's going to change that when you set it up. But what we're shooting for is a roughly 68 percent pop, a sixty eight percent chance of making money on this trade every time, which means there's a thirty two percent chance of losing money, 16 percent on each side. That's how we're going to set this up again. Don't worry. We're going to do this in real time on live platforms as well as you can really see what I mean when I talk about this. But just for understanding purposes, all we're talking about here on this chart is here's your profit potential area and you can see how big it is, which means there's a 68 percent chance of making money on this trade. This red area is where you're going to lose money and that's going to be thirty two percent of the time. That's all you need to kind of gather from this visual. Just a quick visual of where my profit potential is and how wide that area is compared to my losing potential. And here's what it looks like on the chart. And all this is meant to show you is that when we do it one third with the strike Iron Condor, all we're doing is we're centering the stock price between our verticals. So in this example, here's the stock price right here to twenty 11. And when we set up this one third with the strike Iron Condor and this example, you can see right here, here's where we want the stock to be above. Here's where we want the stock to be below. So anything below this blue line, anything above this blue line means we're a winner. And right now the stock is right in the middle. So when we set up a one third strike, Iron Condor, and this is what we're looking to do, basically center the stock price between our two verticals, that's what it looks like visually.