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 5658
The XJO is trading in medium and short term down trend characterised by lower peaks and troughs and the downtrend lines.
The XJO has also gone sidewards for a while now, even though the volatility of the market remains high.
We are also heading into the Christmas period, which tends to be quiet as traders and investors go on holidays, and our market has three extra days where it is closed (Christmas, Boxing, New Years). We can look to do an Iron Condor, with the expectation of at least two weeks of quiet trading.
We would want to place our risk above and below key levels of resistance and support respectively. If the market does indeed not really go anywhere and is subdued during the holidays as expected, we will profit from time decay and can look to make maximum profit if we can reach expiry. I would suggest looking at an early January expiry.
I would suggest waiting until perhaps Thursday or even Friday before setting up the trade as we have the Fed Reserve announcement Thursday which could push the market one way or the other. One this is over, we can look to set levels.
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.