The Iron Condor strategy allows the trader to profit from expectations regarding very low volatility in a currency pair. This strategy requires the purchase of an out-of-the-money (OTM) Put, the sale of an out-of-the-money (OTM) Put with a higher strike price, the sale of an out-of-the-money (OTM) Call and the purchase of an out-ofthe-money (OTM) Call with a higher strike price. The Iron Condor differs from the Iron Butterfly in that the trader sacrifices an amount of the potential profit to extend the points on which profits are maximised.[You must be registered and logged in to see this image.]When to do it
This strategy works best in situations with very low volatility and when the trader thinks that the pair will
not move by a big margin in the set time period.The set-up
Maximum potential profit
- Buy an OTM Put at strike price A (spot - )
- Sell an OTM Put at strike price B (spot - )
- Sell an OTM Call at strike price C (spot + )
- Buy an OTM Call at strike price D (spot + )
- At the time of creating this strategy, the pair’s price will be between B and C.
The maximum potential profit is limited to the premium received.Maximum potential loss
The maximum potential loss is limited to the difference of B and A minus the premium received.
Time impact In the Iron Condor strategy, time decay works in favour of the trader. The trader wants all options to expire worthless.Best/worst case scenario
The best case scenario occurs when the pair’s price ends up being between B and C.The worst case scenario occurs when the pair’s price moves beyond strike prices A and D.Tips
The Iron Condor works well where there are no major events that are expected to highly increase volatility. This anticipation enables the trader to create an Iron Condor strategy and profit from the very low volatility of the pair. By increasing the strike prices of the purchased OTM Call and Put, the trader can increase his potential profit but at the same time he increases the potential losses as well. This strategy would be more suitable than the Iron Butterfly in situations where the trader expects slight volatility but does not want to suffer the losses of this volatility.