Most traders can profit from markets that are either rising or falling. But what if the market is stagnating and going sidewards?
When the market is stagnant, it is very hard to use other strategies to profit, and can be a wasteful tie-up of your capital. 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. 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 as 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 half 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 is 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 BHP Billiton Limited (BHP) which is trading at $30.07.
BHP has been trading in a channel between key resistance at $31.50 and key support at $28.15. Right now BHP is right in the middle of this range, and provides a good opportunity to trade an Iron Condor. We can place our risk above and below these key levels of resistance and support respectively. As long as BHP continues trade within this range by expiry, we make maximum profit on the trade.