Iron Condor on Woodside Petroleum Ltd (WPL)
Published 09-MAR-2017 11:56 A.M.
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2 minute read
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When the market is stagnant, it is very hard to profit and can be a wasteful tie-up of your capital. Following on from last week’s article What is an Iron Condor, this strategy could potentially make maximum profit if the stock remains between two particular levels. Karno Cornips applies this strategy to Woodside Petroleum.
Bullish and bearish movement can occur, but only to a specific point, in order to potentially maximum profit.
So when would we use one?
An Iron Condor is best used when there is very little movement in the market. The stock can continue to trade up and down, but provided it stays between two particular levels, you could still make maximum profit.
However it should be noted that no trading strategy is a guarantee of success and investors should seek professional financial advice about their trading strategies before making an investment decision.
From a technical perspective, an Iron Condor is best used when a stock is trading between a strong level of resistance and support, forming a channel pattern. We can place all our risk both above the resistance level, and below the support level, which acts as protection for our trade. As long as the stock continues to trade in the channel between the resistance and support levels, we could potentially make maximum profit. We can also use both these levels a technical stops; if the share price breaches them, we may close out part, or all of the trade.
Iron Condors can also be setup in a way where if the trade does what you want, and you make maximum profit, you will close out for zero fees and therefore half the cost of the trade.
The other reason traders like this strategy is it can be managed from afar. It doesn’t require too much attention, and is suitable for traders who perhaps work full time and don’t have the capacity to be actively trading day in day out.
Let’s run through an example.
The chart below is of Woodside Petroleum Limited (WPL), which is trading at $31.23.
WPL has been drifting sidewards to lower since late January. It recently found support at $30.40 and has since bounced strongly. WPL looks to be heading back towards the top of the range, to around $32.00 where the downtrend lies. We ultimately believe WPL will continue to trade sidewards, between the $30.40 support and the $32.55 resistance. Right now WPL is trading around the middle of the range, giving plenty of breathing room to support or resistance.
WPL volatility levels are relatively high, and combined with the technicals, is a great setup for an iron condor. We can place all our risk either above $32.55, or below $30.40, giving the best chance for maximum profit provided WPL trades within that range.
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