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 Ramsay Health Care (RHC) which is trading at $55.72.
RHC has been trading in a sidewards pattern since roughly July this year. You can see clear resistance at $58 which has been acting as the top of the channel, and clear support between $53 and $54 which has been acting as the bottom of the channel. Since September it has consolidated in an even tighter range between $56 and $54 and price movement during this period has been rather subdued. It’s fair to say RHC is having a hard time making its mind up.
This indecisiveness can be profitable though if we can trade it right. We can look to place an Iron Condor where our risk is placed both above the $58 level of resistance, and the below the $53 level of support. We also have the other resistance and support levels protecting the trade from reaching the top and bottom of the channel.
As long as RHC continues to trade in between $58 and $53 come expiry, we make maximum profit and halve our costs.