Risk Free Iron Condor – How to Setup An Iron Condor With No Potential Loss

A risk free iron condor with no potential for loss is a complicated options strategy that can be set up with the right market environment. There are different ways in which you can set up a risk-free iron condor and it’s important to understand the different methods so you can do it effectively. It’s worth noting that you do need the right market environment for this to work and it takes careful order placement and monitoring to pull off successfully. Let’s take a look at the different ways you can set up a risk-free iron condor.

The Short Call Credit Spread + Naked Put 

It’s worth noting, that there’s no free lunch in the market. This strategy requires careful monitoring to squeeze out a risk-free profit. The risk-free iron condor method starts with a short call credit spread along with a naked put. We will only buy a put if the trade turns against us. The trade-only turns to a regular iron condor if the price of the stock moves to the downside against us. 

How the trade starts off:

  • Sell 1 OTM call option
  • Buy 1 OTM call option 
  • Sell 1 naked OTM put option
  • But 1 OTM put option (only if the price turns against us)

This is an overall bullish trade that hopes that the price of the stock remains above the short naked put at expiration. There is a specific way that this trade needs to be structured in order to be in a position to capture profits with zero risk.

Below is the main condition that must be satisfied when this trade is initially set up.

  • The credit collected on the naked OTM put option has to be greater than the width of the short call credit spread.
  • This trade should be done about 2 – 4 weeks out in expiration
  • The implied volatility for this type of trade should be medium to high

By collecting a larger premium than the width of the short call credit spread, we ensure that there is no risk to the upside for this trade.

If the price of the stock blows through your short call credit spread at expiration, you keep the full premium on the naked put minus the loss on the credit spread. The credit gained on the naked put is greater than your loss on the short call credit spread.

How to Setup An Iron Condor With No Potential Loss

So, what would this look like as an example if the price of AAPL was currently at $175?

  • SELL AAPL 185 Call + $2.75 credit
  • BUY AAPL 186 Call – $2.25 debit
  • SELL AAPL $165 Put + 1.55 credit

As you can see, with this example, the width of the short call spread on AAPL is only $1 and we collected $1.55 on the put side which satisfies your main condition. We also received a total of $2.05 as a net credit for putting this trade on.

Total Credit Received = $2.05 ($0.50 + $1.55)

Next, we wait and watch how the price of the stock changes over the next few weeks.

Management of the Trade

You want the price of AAPL to rally to the upside by expiration. If this happens, your trade will end up profitable. If the price of AAPL starts to head down south, you will have to make a trade adjustment to protect your downside. This is where the other component of the trade will come in and where we will finish our iron condor.

If the price of AAPL starts to drift lower and closer to our naked put price of $165, we need to buy a put at $164 which will create a put spread below the market for us. This will mimic our call spread that we have above the market price.

We initially took in a total credit $2.05 when we set up this trade. To lock in risk-free profits on this iron condor, we have to spend less than $2.05 when we buy our put. This will ensure we take in a net credit after we lock up our iron condor. When we buy our put option it should have the same width as our short call spread. Otherwise, it would be considered a broken wing iron condor.

As previously mentioned, the width of our short call spread is $1.00. If we want to capture more profit, we have to aim to spend less than the width of the call spread to lock up our iron condor. This isn’t a necessity, but it will ensure we extract as much risk-free profit as we can from this trade.

Bottom Line

This trade takes some patience and experience to perform successfully, but if managed correctly you can capture risk-free profits by locking up your iron condor. It’s worth noting that this trade will fail to work during periods where there are sharp movements to the downside early on in the trade. As such, it’s important to select a stock that is slowly trending higher with a medium to high implied volatility environment.

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