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A condor spread is a trading strategy used to increase the chances of profiting on a security with a limited price range. In a variation known as the iron condor, the risks associated with the strategy increase, but so do the potential profits. Condor spreads are an example of an advanced trading tactic used by experienced traders. People with less experience may be able to set up such a spread with the assistance of a financial advisor.
In a condor spread, people take options with four different strike prices to establish their position. The condor spread includes a mix of strike prices to take advantage of bullish and bearish market trends. If the market goes up, the trader will be in a position to profit. If the market declines, the trader will also have options in place for trading. With a condor spread, there is a broad range of potential profits spread out between the various options. Traders can choose to buy all call options or all put options. In the iron condor, both call and put options are purchased to maximize the potential profits.
Setting up a condor spread is expensive, as the trader must purchase four separate options. These purchases can come with commission fees and other expenses. Thus, the trader needs to select options carefully and to consider whether the purchases will end in a net profit, and how large that profit will be. Condor spreads are low risk because the trader's chance of making money on one of the trades is very high, but the profit margin is also very small because of the cost of setting up the strategy.
This strategy is closely related to the butterfly spread, where a trader purchases three contracts at different strike prices. In this trading strategy, there is a narrower range of potential profits, but the trader can make bigger profits off the spread. Iron butterflies, a variant on the basic butterfly, come with even higher potential profits, as well as risks.
To engage in a trading strategy like a condor spread, a trader needs to be familiar with the market and the options being traded. It is also beneficial to feel comfortable with various trading strategies and to be familiar with the alternatives, allowing the trader to select the best strategy for a given situation. Traders use a variety of tools to make investment decisions, from reading company profiles in trade magazines to watching moves made by other traders.