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Premium Collecting With Nadex Spreads: Iron Condor

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With Nadex spreads, traders who think the underlying market might not go anywhere and just oscillate around where it is can trade what’s called an iron condor as a neutral strategy.

 

Two previous articles in this series covered how to collect premium (credit spreads) in an upwards or flat market and how to collect premium in a downwards or flat market using Nadex Spreads.

 

Traders can do this every day, even multiple times a day. Doing both is called the "iron condor" and can help traders combine both for a larger potential profit and a larger break-even distance. Traders sell the upper spread and buy the lower spread.

One tool that traders can use for trading iron condors is the APEX Nadex Spread Scanner. The APEX scanner is free to use and an excellent way to look through all the Nadex spreads for a particular instrument. Users can quickly see the risk/reward, time to expiration, width of the spreads and proximity to the underlying market for comparison enabling them to pick the most advantageous trades.

Related Link: How To Determine Intrinsic Value Of A Nadex Spread Option

To start, traders should know exactly what a Nadex spread is. It has a floor and ceiling level, and time limit to expiration. Nadex offers intraday two hour and 8.25 hour as well as daily spreads. They can be traded anytime during the trading hours of the particular spread up until expiration.

Their width and distance can be from 100 ticks to 1000 ticks depending on the market and expiration. All of the Nadex markets move in ticks with the smallest increment being one, and every tick is worth $1.

When long, a trader's max profit is the distance between their entry and the ceiling. When short, a trader's max profit is the distance between their entry and the floor. The max loss when going long is the distance between your entry and the floor. When short, the max loss is the distance between entry and the ceiling.

Should the market move past the ceiling or floor, traders cannot lose additional money or make additional money.

Typically, iron condors are excellent for when the market is flat or oscillating in a specific range. Therefore, it’s called a “neutral” strategy.

For example, consider a crude oil iron condor. When buy and sell crude oil spreads are put together, it is an iron condor premium collection trade. For this setup, traders would sell the upper spread, Crude Oil (Apr) 103.00-108.00 and buy the lower spread, Crude Oil (Apr) 98.00-103.00.

Putting the two together, the top of the iron condor is 108.00, the middle of the iron condor is 103.00 and the bottom of the iron condor is 98.00. In this example, there is a max profit of 54.2 for the buy and 22.2 for the sell.

What makes this a premium collection Iron Condor is the inverted proximity to the underlying market. Proximity means the distance of the price of the spread to the underlying market.

For the long spread, the price is 23 ticks below the underlying market. So, there are 23 ticks of premium built in there. The market could fall 23 ticks and the option would still be at break even on the trade because it was bought at 23 ticks below market.

Now looking at the sell spread, its price to sell is 56 ticks above the underlying market. The market could move up as much as 56 ticks and the trade would still be at break-even on the sell side.

This particular iron condor has premium in it to collect. However, it is not necessary for there to be premium to profit with an iron condor.

To view image click HERE

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When both spreads are put into an excel spreadsheet as shown below, it becomes easy see what the potential profits and losses are on both sides and where the break-even points would be. In this case, the underlying market is trading right around 102.65. If the market moved up 54 ticks to 103.19, the trade would profit $54.

The sell price of the upper spread was 56 ticks above the underlying market; therefore, the underlying could go up that much before the trade would start to lose money on the sell side. Actually, the buy spread caps out at 103.00. So, as soon as the market reaches 103.00, the trade has reached its max buy side profit of 54.

If the market continues up though, it could go up by 56 ticks without losing on the sell side. It could go up another 54 ticks, which would be the max profit amount on the buy side, before reaching the break-even point. It could go up a total of 110 ticks to 103.75 to reach the high break-even point.

To view image click HERE

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If the market moved down, it could go down to 102.43 for 22 ticks of max profit on the sell side. Again, the buy price of the lower spread was 23 ticks below the underlying market; therefore, the underlying could go down that much before it would start to lose money on the buy side.

If the market continues down though, it could go down 23 ticks without losing on the sell side. It could go down another 22 ticks, the max profit amount on the buy side, before reaching the break-even point. It could go down a total of 45 ticks to 102.20 to reach the low break-even point.

This was an example of a premium collection iron condor because of the inverted proximity to the underlying. Normally, the price proximity to underlying is not negative for buy side spreads, or positive for sell side spreads. The spread we sold was deep in the money and the spread we bought was in the money. Inverted proximity to underlying is not needed to be profitable doing an iron condor.

To learn more about the best times to use iron condors, please visit: www.apexinvesting.com. APEX provides the free Nadex spread scanner and will have an iron condor calculator tool coming soon.

 

To learn more about how to trade binary options in-depth and for binary options signals, trading strategies, tools and trade rooms see ApexInvesting.com.

Posted-In: Binary Options Education Futures Commodities Options Forex Markets General Best of Benzinga

 

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