An Iron Condor is a non-directional options trading strategy that offers the upside of providing a high probability of a fixed profit with the risk managed downside of a limited loss potential.

So what does that really mean?

It means that regardless of whether the stock that underlies the options goes up -or down- in value, as long as it stays in the range expected (until the options expire), then the strategy will be profitable (that’s “non-directional”).

If, at expiry, the stock price is outside the range anticipated, then a loss will be incurred. However, the loss is limited to being less than or equal to a predetermined amount. This means that it is risk managed because the maximum potential loss is known before the trade is entered, and if it would exceed required risk profiles then the trade (and loss) can be avoided.

The graph below shows an example Iron Condor (blue line shows the risk profile at expiry). In this example if the stock price remains between $109.19 and $126.80 then its profitable (up to $400). If the stock goes outside these limits then it results in a loss that could reach a maximum of $600 (if held until expiry).

The “high probability” of success alluded to in the first paragraph is dependent on proper design of the Iron Condor, and is crucial to long term profitability of applying the strategy. It is based on an analysis of the option pricing, strikes and other parameters.