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. 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 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 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 Insurance Australia Group Limited (IAG) which is trading at $8.14. Today IAG went up and held below key resistance at ~$8.25. Recently it started trading in an uptrend which has led it just below key resistance. Previously it had been channelling below this resistance and using $7.37 as key support (green lines). Now that it is near the top of this range, we could see IAG continue to channel. Beyond these levels we also have key support at ~$7.33 and key resistance at ~$8.31 (orange lines). IAG hasn’t traded outside this broader range since February.
Outside technical analysis, world markets also seem to be traveling sidewards at the moment and any bullish inclination may be offset by the gradual drip of negative information released by the Royal Commission. All in all, it seems IAG in the medium term isn’t likely to make significant gains or losses.
We can take advantage of this by using and Iron Condor, and placing our risk outside the orange lines, or outside the green lines. Obviously providing yourself more breathing room is more conservative, and less, more aggressive.
Provided IAG stay between the two levels by expiry, you can make maximum profit, and if setup correctly, not worry about exit costs and halve costs.