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9 Weeks to Better Options Trading: Iron Condors

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Veteran options trader Steve Smith breaks down iron condors.

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Editor's note: To help investors profitably navigate the options market, Minyanville is launching "9 Weeks to Better Options Trading," an educational series aimed at increasing trader understanding of the nuts and bolts of options, with an emphasis on real-world applications. In this series, veteran options trader and author of OptionSmith (Click here for a two-week FREE trial and get Steve's best trading ideas in real time) Steve Smith will demystify a range of topics from options pricing to trading strategies to special situations like earnings reports and takeovers.

For the first article in the series, click here.

If you are a novice options trader, we suggest you start with Steve Smith's 6-Week Options Trading Kickstarter series.

Options traders often want to make bets on volatility. However, doing so can entail taking on inordinate downside risk. To limit this downside risk, we can use combinations of spreads, the most common of which is the iron condor.

While iron condors can be bought or sold, they are typically sold for a credit to take advantage of a stock or index that is in a trading range. They benefits from both time decay and a decline in implied volatility. Selling an iron condor is a bet that the underlying shares will remain in a limited range and have an accompanying low or decrease in volatility. If you were buy an iron condor, you are banking on a break outside the range that is defined by the condor's outer strikes, or "wings."
Before jumping fully into iron condors, let's do a quick overview of put/call combinations.
A straddle is the simultaneous purchase or sale of a put and a call that have the same strike and same expiration.
No positions in stocks mentioned.

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