Iron Condor Risk Reward Explained: Why I Win 1 and Risk 2
Why the iron condor payoff that looks backwards is the one that pays
Why the payoff looks wrong
Most traders want to win two and risk one. On an iron condor I do the reverse, and this clip from a live Elite Trader call explains why. The condor collects a credit, and the width of the wings sets what can be lost. When the credit is about half the width, the trade wins one and risks two, and most people stop reading there.
What the probabilities add
The part they skip is how often each outcome happens. A condor with that shape sits well outside the expected move, so the price finishes inside the wings far more often than outside. Many small wins against fewer, larger losses is a positive expectancy once the win rate is high enough, and the option prices tell you that rate before you enter.
Why the exit rule decides
The theoretical loss of two is almost never the realised loss. I close winners early, when most of the credit is earned, and I manage a threatened side long before expiry. The clip walks through the numbers on a real position so you can see how the shape that looks upside down is the one that compounds.
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