John Jagerson

Trading Iron Condors -- Part I

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This article is brought to you by LearningMarkets.com.

There are more option strategies than option strategists, but at their heart they are all modifications of basically two ideas -- buying or selling options.

The proliferation of options strategies come from the infinite ways that these two concepts can be combined. Some of these combinations can be great ideas, but others are just commission generators with the difference usually resting on how you implement them as a trader.

In this article, we will start discussing one such combination strategy that is becoming more and more popular with option investors all the time: the iron condor.

An iron condor is a combination of a long and short strangle, which is also the same as two credit spreads.

When abused, the iron condor strategy can be a great way to make money -- if you are an option broker -- because they are very high-cost trades. However, if they are applied appropriately, iron condors can be very interesting for risk-tolerant investors.

Iron condors are often marketed by advisory services and brokerages as a "high probability" trade. Unfortunately, that phrase is very misleading and can give option traders a false sense of security.

In this series, we will discuss why the inexperienced call these trades "high probability" and why that is not necessarily true. This is important to understand because it will focus your attention on analysis that matters, rather than arbitrary and theoretical probabilities.