Keith Fitz-Gerald

Lock in 'Iron'-Clad Profits with Condors

by Keith Fitz-Gerald   09/03/08

When you place this trade, you receive a credit of $100 ($1 credit spread multiplied by 100 = $100) in your account (50-cent credit for the call spread + 50-cent credit for the put spread = $1). As long as the XYZ index is trading between $50 and $150 at expiration, you get to keep the entire $100 credit to your account.

The maximum upside risk to this trade is the difference between the call strikes ($155 - $150, or $5) less the credit you received when you put the trade on. In this case, that's $400 per contract -- or, $5 - $1 = $4. The maximum downside risk is the same.

What's more, since XYZ can't finish in two places at once, half of every trade is going to win every time, which brings me to my next point.

If you pick your strike prices properly and each Iron Condor has at least an 80% probability of profit, you can reasonably expect to win 9.6 times out of every 12 trades. Assuming you're initiating Iron Condor trades monthly, that's roughly nine out of every 12 months. That's a huge edge when it comes to trading of any kind, but especially options.

And that's really the key to what makes the Iron Condor the "holy grail" in my book. Not only can you strictly limit risk with this trade, but you can do it in such a way that dramatically increases your chances of winning at the same time.

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Keith Fitz-Gerald is the Investment Director for Money Morning/The Money Map Report. For more information on Keith, read his bio here.