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.
CCL has been trading in a sidewards channel between a strong resistance level at $8.75 and a strong support level at $8.00. Aside from channeling, CCL has of late been doing rather ‘whippy’ sidewards movement, with one day up, the next day down. This makes directional trading hard, so instead, we can look to trade an Iron Condor where we can profit purely from sidewards movement and simply being in the trade.
We just have to make sure we place our risk above and below the resistance and support levels (respectively), so that we can protect our trade with the boundaries of the channel.
If by expiry the share price remains in this range we make maximum profit and save half our costs!
