Best Stocks For Iron Condors
Introduction
Most investors are familiar with the investing mantra “the trend is your friend." The problem with this mantra is that markets actually trade sideways most of the time, so you need to have strategies in place that allow you to profit when markets are range-bound. An iron condor is one such options strategy that can be used in a sideways market.
It is used when a trader believes that the price of an underlying stock will not move very much. It gets its name from the shape of the payoff diagram that looks like a bird with two wings. At its core, it uses four options contracts – two calls above the trading price and two puts below the trading price.
The effect is that risk is minimized. However, so are profits. This article will explore how you can improve your profits by ensuring you select the best stocks for an iron condor.
My Top 15 Best Stocks For Iron Condors
While I prefer to trade index options for iron condors, there are times when I will trade individual stocks, but with strict criteria for which stocks to choose. Below is a list of what I believe are the 15 best stocks for iron condors.
Let’s take a look at why I think these ones are the best.
Picking The Best Stocks For Iron Condors
Not all stocks are created equal when executing an iron condor, and a key part of being profitable is avoiding the wrong types of stocks in the first place. An iron condor is profitable when a stock moves as little as possible in the price – this gives us the most important criteria when considering which stocks to pick.
Several factors inform whether a stock is a good candidate for moving as little as possible:
Factor 1: High Liquidity
If you’re looking at a stock for an iron condor trade and it has low liquidity, that is a huge problem. Generally, if a stock has low liquidity, there will be a large bid-ask spread, which makes it difficult to get filled for a good price. This is going to impact your bottom line on trade entry, exit and any time you need to make an adjustment.
All the stocks listed above are large market cap stocks with highly liquid options and tight bid ask spreads. Always check volume and open interest for the stock and strikes you are looking to trade. If there is low liquidity, the market makers will take their pound of flesh from you.
Factor 2: Stock Price Above $100 (Or Thereabouts)
It can be very hard to trade iron condors on low priced stocks. There aren't enough strike prices available and you need to trade lots of contracts, which can then get expensive. For this reason, it’s best to focus on stocks trading above $100.
Factor 3: Large Capitalization
Large-cap companies are much better suited to an iron condor strategy than small caps. Small caps encompass small, agile, and nimble companies that can quickly create new products and services, resulting in a possible spike in revenue and their share price.
On the contrary, large caps are slow, lumbering beasts with generally steady earnings. Their risk appetite is lower and their level of bureaucracy means they are slow to pivot and change direction.
Coupled with sizeable market share, large changes in earnings growth are highly unlikely, resulting in a slower growth, but much more stable share price.
Basically any company in the Dow Jones Industrial Average could apply here.
Factor 4: Implied Volatility Rank
One of the most useful technical indicators for iron condors is the implied volatility rank. Implied volatility rank is a measure of how cheap or expensive a stock's options are relative to its historic volatility.
When implied volatility rank is high, iron condors have the best chance of being profitable, so use the rank as a handy guide for timing your entries.
Putting It All Together
When combining all these factors, the stocks you’re likely to pick will be ‘blue-chips’ – the sort of household names everyone knows and that have been around for decades.
Your final consideration should be the timing of the trade – it is no use picking a fantastic stock that meets the four factors above and then executing the trade when an earnings announcement is due in a few days. Always check that no upcoming announcement is due from the company and be aware of any key government statistic dates which could have an impact (e.g. employment participation rate and its impact on websites that provide job listings).
Conclusion
An iron condor is an advanced options strategy that allows a trader to take advantage of a stock that doesn’t move much in price. As a result, the primary criterion for success is that you choose a stock that you think is likely to move as little as possible. There are five factors to consider – high liquidity, price above $100, large capitalization, and implied volatility rank.
Finally, ensure you avoid entering an iron condor around significant events such as earnings reports, as these will increase your risk unnecessarily.
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are ...
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