Whether you’re a staid, conservative buy-and-hold value investor, or a rambunctious daytrading cowboy, the iron condor options strategy can play a valuable role in your portfolio. Here are the top 5 reasons every investor or trader should use iron condors:
1. Reduce portfolio volatility. Iron condors can reduce the size and frequency of portfolio fluctuations over time. It doesn’t matter whether you a have a portfolio of long-term index funds or a stable of roaring momentum stocks – if you want to smooth out the bumps along the way, trading a few iron condor spreads each month can help reduce that portfolio volatility.
2. Get market-neutral. Sometimes it’s just too hard to know where the market is going: long plays don’t look so hot when it seems the economic is moving into recession, but short plays can get overextended and easily reversed. Well, when you think the market might go nowhere fast, your choices have traditionally been limited to cash, maybe some bonds, etc. But the iron condor strategy is specifically constructed to profit from the passage of time – no matter whether the market goes up, down, or sideways.
3. Generate income. One of the nicest things about iron condors is that they’re income-oriented. You receive a credit for opening the position, and once you pay any exits costs to close out the trade, you get to pocket the net credit and move on. You don’t have to depend on a stock or option moving dramatically to make money; quite the contrary, you can use condors to bring in income ever month as a nice portfolio buffer. Our trades typically average 9-10% per month, and we attribute that success to the strategy itself, not to any trading genius on our part.
4. Develop discipline. One of the toughest aspects of trading iron condor options is that it forces you to be a permanent contrarian. When the market sells off, you hope it will move right back up the next day. When the market rallies, you want everyone to take profits and send prices back down tomorrow. But one extra advantage to trading this strategy is that it teaches you to examine your own biases and assumptions, and the nature of the trades themselves force you out of any unquestioned assumptions under which you might be operating.
5. Go do something else. One great feature of this strategy is that iron condor trades don’t require you to sit in front of a screen all day, nervously watching your positions. Since these trades profit from the passage of time, you can go pass the time doing something more important than trading: kiss your spouse, work on that novel, take up parkour. This honestly isn’t an exaggeration: a quick check on the markets every other day or so is basically all you need to do to maintain and iron condor position until you’re ready to close it out.
Now, if you’ve never heard of this strategy before, you might be wondering what on earth an iron condor is, and what makes it different from other options strategies. While we don’t have the space to go into that here, if you’d like to know more, there’s plenty of in-depth information available over at our options blog.