Most traders can profit from markets that are either rising or falling. But what if the market is stagnating and going side-wards?
When the market is stagnant, it is very hard to use other strategies to profit. Instead, traders can use an Iron Condor, where you will make maximum profit if the stock remains between two particular levels. Bullish and bearish movement can occur, but only to a specific point, in order to make maximum profit.
So when would we use one?
An Iron Condor is best used when there is very little movement in the market or stock. The stock can continue to trade up and down, but provided it stays between two particular levels, you will still make maximum profit.
From a technical perspective, an Iron Condor is best used when a stock is trading between a strong level of resistance and support, forming a channel pattern. We can place all our risk both above the resistance level, and below the support level, which acts as protection for our trade. As long as the stock continues to trade in the channel between the resistance and support levels, we can make maximum profit. We can also use both these levels a technical stops; if the share price breaches them, we may close out part, or all of the trade.
Iron Condors can also be setup in a way where if the trade does what you want, and you make maximum profit, you will close out for zero fees and therefore halve the cost of the trade.
The other reason traders like this strategy is it can be managed from afar. It doesn’t require too much attention, and can be suitable for traders who perhaps work full time and don’t have the capacity to be actively trading day-in day-out.
Let’s run through an example.
The chart below is of CSL which closed today at $195.30
Last month on the 25th of February I suggested doing a Condor on CSL which ended up making maximum profit. For the same reasons as last time, CSL looks like it could continue to travel in a sidewards movement as it holds the ~$200 resistance level. Instead though, we can see that CSL has a new support level at $183 which we can use rather than all the way down at $174.
Like last time, we can see that the 200 (red),100 (blue),and 50 (green), moving averages are converging at the moment which can indicate sidewards movement.
The idea is we want to place our risk both above the key resistance and below the key support and let them in conjunction with the MAs protect the trade from excessive bullish or bearish movement.
If we can make it to expiry near the end of the month and CSL is both under $200, and above $184 we will make maximum profit and half our costs.