There are lot of option strategies available on internet. As a beginner you should always consider less risky strategies. Iron condor is one among them.
Before jumping into the strategy and applying it , you should understand the strategy first. I presume that you have basic knowledge of options. You can refer my blog “Option Basics Greeks“.
Iron Condor is direction less strategy designed to earn a profit when the underlying security or future is to have little or no volatility. If you think the market is going to be less volatile till the current expiry (for nifty contract it is last Thursday of every moth), you can construct an Iron condor. You might be thinking how would I know the current volatility of the market. Don’t worry you can check it at Nseindia.com website. If you have opened the previous link you can see all indices with India VIX. It shows you the current volatility. While the market is in a bull run volatility comes down so the fear factor VIX also comes down. When market is in down trend VIX shoots up so the option price also.
Please check my Blog “Option pricing Greeks” to understand the relation between VIX and option price. Avoid constructing this strategy when there is lot of volatility in the market due to global events, election result days etc. On these days VIX will shoot up and there is a chance that your position will end up in loss. Most of the other days in a moth are suitable to construct an iron condor.
How do you construct and Iron Condor
Today’s Nifty Spot – 8726
In order to construct Iron Condor you will
- Sell Nifty Sep 9000 CE for 18.70
- Sell Nifty Sep 8400 PE for 16.25
- Buy Nifty Sep 9100 CE for 7.85
- But Nifty Sep 8300 PE for 9.95
What is your risk
Even though it is a less risky strategy the maximum loss incurred is always grater than the maximum profit earned for a wrong trade. But you can apply this strategy for 80 % of time to extract 2%-3% gains.
What is your reward
It is a limited profit limited loss strategy. The maximum gain you receive will be difference of Total premium receive by selling contracts – total cost for purchasing contracts.
((18.7 + 16.25)x 75 -(16.26 + 7.85) x 75) = 1286.
Hope this article helped you … Kindly post your comments and suggestions..