Of all the various option spread strategies out there, the iron condor strategy is perhaps one of the most popular, the most talked about, the most used (or misused) – and possibly the most dangerous and misunderstood option strategy of them all.
The problem is that way too many new option traders slap down significant money and start trading iron condors immediately upon discovering them without first equiping themselves with the proper knowledge and skills needed to trade them properly. They are so captivated by the stories and claims of ten percent months and 90 percent probabilities that somehow they don’t stop to think about what they are going to do if their trade doesn’t go exactly as planned.
And unfortunately what always seems to happen to a high percentage of them is that they promptly wind up getting their trading accounts demolished and their heads handed to them on a platter.
Now stop – wait – hold on just a second.
Before you start to get the wrong impression, please, let me clarify something here.
I absolutely LOVE iron condors. ALOT. In fact, the iron condor is right up there as one of my favorite trading strategies.
And I think it REALLY IS a good solid trade.
And yes, I absolutely believe all those stories and claims you hear swirling around about iron condors generating ten percent plus monthly returns and providing trades that have the probability of winning somewhere in the range of eighty to ninety percent. In fact, I KNOW those stories are true because I see it happen all the time in my very own trading account.
The problem is – there is something big that is being left out of all those claims and stories – and this something is causing way too many fresh new doe eyed option traders to misunderstand this strategy right from the beginning and blindly jump into them with completely wrong expectations.
See what isn’t being talked about with iron condors is that while yes, they can provide great monthly returns and high probabilities of winning- they also come attached with a horrendous risk to reward ratio – sometimes as poor as 10 to 1!
10 to 1! That means that in order to try and make just one dollar, you need to be willing to risk ten. Or, put another way – in order to make 100 dollars, you need to risk 1,000 dollars. Or – risk $10,000.00 to hopefully make just $1,000.00!
And as my dear old mammy used to say: ‘that smells a lot like an awful bad egg’. Which in fact it is. That risk to reward ratio is nothing but a low down, no good, smelly rotten deal!
Because once you do the math you find that even with those glorious monthly returns with 80 to 90 percent probability of winning – all it takes is just one problem month to come along and cause a loss that will completely obliterate the 8 to 9 wins you’ve managed to rack up – as well as potentially the rest of your entire account!
All isn’t lost. There IS hope…
Because – as I wrote previously – I REALLY DO like the iron condor strategy.
It’s one of my favorite trades – and it continually generates profits for me.
So clearly there must be a way to profitably trade this strategy without allowing that awful risk to reward issue to get in the way.
And yes, there certainly is.
It’s all in how you manage the trade.
That risk to reward problem quickly becomes a complete non issue as soon as you educate yourself on the proper way to initially set these trades up and how to correctly manage and adjust them.
You just need to take the time BEFORE jumping into the iron condor pool to equip yourself with this little bit of knowledge. A few simple ‘tricks of the trade’ – so when those problem months DO come along (and they WILL believe me) – you will know exactly what you need to do to immediately squash that threat, easily adjust yourself out of the problem, and experience the iron condor for all it’s ‘really’ cracked up to be.
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