Most traders get discouraged by losing trades. In fact, most day and swing traders lose at a rate of 40–60%. The regret and disappointment of a loss can be overwhelming and frustrating.
Most traders are looking for strategies that offer a high win rate, without having to predict market direction.
In contrast to market direction prediction techniques, the basis of this strategy is rooted in mathematical logic, thus drawing attraction to more risk-averse traders. In this strategy, known as the Iron Condor, traders need not worry whether the market is going to move up or down. It’s meant to be easy to learn and easy to execute with reduced uncertainty.
The Iron Condor strategy is a great method for options traders, profiting from the volatility of the market without having to predict the direction of the movement. Traders can set up their trades to win most of the time by selling options with a low chance of being in the money, such as 10 Delta options, and buying further out-of-the-money options as protection. This is an effective strategy because it relies on probabilities and statistical analysis, making traders win as many as 80% of the time.
Strategy Explanation
The Iron Condor strategy works by establishing both call and put options on the same underlying asset, like the S&P 500 Index, SPX, but with different strike prices. The trades are such that there is a high chance of expiring worthless, which is the goal, and leaves the trader with a net profit from the premiums received when selling the options.
The main advantage of the high win rate in an Iron Condor is its choice of strike prices. Most often, a short call and a short put have a Delta around 10%. This gives them a 10% chance that the option will be in-the-money by expiration. Then, with protection, there is a longer-out-of-the-money option that adds a smaller percentage chance of loss. When these trades expire worthless, the trader gets to keep the initial premium collected, hence making a consistent profit.
The Example Trade:
Let’s dive into a practical example using the S&P 500 Index. On January 1, 2022, the index opened at 4788. Traders could have pulled up an options chain expiring on February 28, 2022. By selecting 10 Delta calls at a strike price of 5050 and 10 Delta puts at 4260, traders could sell these options and buy further out-of-the-money options for protection.
Here’s how the trade works:
- Sell 10 SPX 5050 Calls (10 Delta)
- Buy 10 SPX 5060 Calls (for protection)
- Sell 10 SPX 4260 Puts (10 Delta)
- Buy 10 SPX 4250 Puts (for protection)
It is an Iron Condor. The cash received at the inception from selling the calls would be about $10,200, and from the puts, $22,900. After protection costs ($9,200 and $2,230), the trader has a net cash inflow of $1,600.
The Results:
After two months, if the market has moved sideways or stayed within the range of the short options (5050 for calls and 4260 for puts), all the options will expire worthless, and the trader keeps the full $1,600. The key to success with this strategy is that the market doesn’t need to move in any particular direction; it simply needs to stay within the specified range.
If the market moves drastically in either direction, the trader will be required to pay out under the short options, but this is rare. Statistically, the likelihood of the options expiring worthless is 80%, giving the trader a strong probability of success.
The Statistical Edge:
The 80% win rate comes from the low probability of the options reaching their respective strike prices. Given that the short options are at 10 Delta, there’s a 10% chance that they will expire in-the-money, and therefore there is a payout to be paid by the trader. Thus, the win rate is about 80% simply because 10% of the time, the market will move beyond the short put, and another 10% of the time, it will breach the short call. This gives a statistical edge to the strategy, making it a reliable way to generate consistent profits.
Rolling the Trade:
At times, the market will steamroll in one direction and keep pounding on the trader’s position. In these situations, the trader can “roll” the position to adjust the strike prices in order to keep the probability of success. For example, if the SPX index had dropped dramatically, then the trader could roll short puts with a lower strike price on the options to bring the Delta back to 10.
Although rolling a position costs something, in this case, $1,150, it can save a trade and ensure profitability. For instance, even after rolling the position in October 2022, the trader was still left with a profit of $650, which proves that the strategy is profitable even after adjustments.
Conclusion:
The Iron Condor strategy is an excellent way for traders to win up to 80 percent of their trades without trying to predict the direction of market movement. By picking options with a 10 Delta probability, and using protective positions to create a high-probability setup that works in different market conditions, traders can win more trades even when the market moves directionally. This approach is a great solution for those who are tired of the frustration of constant losses and want a more reliable method for consistent profits.