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 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 the XJO, the index of the top 200 stocks of our market by market cap. It is currently trading at 5874.
Recently the market has been traveling sidewards, between a key resistance and support level of roughly 5950 and 5800 respectively (the two blue straight lines). These levels are significant with more than one touch point to reinforce each of them.
The XJO is also still trading in an uptrend, but in the short term looks a bit overbought. Considering the recent short term peak is virtually the same as the previous one, the XJO’s ascent appears subdued for the time being.
We could trade an Iron Condor here with the expectation that the XJO continues to hold these support and resistance levels, as long as we place risk outside them. The closer the two sold legs are together, the closer in time you can choose your expiry and therefore get the most out of time decay. Of course that means if you widen the gap between the two sold legs, you will probably have to go further out in time with the chosen expiry or taken on a very large risk for limited reward. It’s important to balance all these elements when placing a condor so that you are happy with not only the trade but its risk/reward.
Once in the trade, we just need to keep an eye on the market every day, but only briefly as what does all the profit making is simply being in the trade and watching time tick by.