![]() Figure 2 shows the spread described above with 48 days until expiration. That’s where strike selection comes into play for the iron condor options strategy. The iron condor’s success depends on the market staying within a range of prices. No matter how high the stock rallies above that point-$115, $125, $200 or higher-it’s all the same.Ĭonversely, if you sold only the call spread, the stock can keep dropping as long as it stays below $115 through expiration, the call spread should expire worthless. For instance, if you had sold only the put spread, as long as the stock stays above $110 through expiration (and you’re not assigned early), the spread should expire worthless. But you have increased the risk of loss in terms of where the market can go for that loss to happen. Yes, the maximum loss potential is $241 for either the put spread or the call spread, so you haven’t increased your dollar risk by selling both spreads. Need a refresher on the basics of options expiration? Here’s an overview. If the stock is above $110 or below $115 through expiration, then both spreads should expire worthless and our trader will keep the $2.59 ($259 per spread) as the profit (minus transaction costs).īut keep in mind that after establishing a short option position, it could be assigned by the option buyer at any time up to expiration, regardless of the in-the-money amount. The maximum risk on either spread is $5 – $2.59, or $2.41 per spread (which is really $241 for a standard-deliverable one-contract spread) plus transaction costs. Suppose a stock is trading at $112 and a trader decides to sell the 110-105 put spread and the 115-120 call spread, that creates an iron condor, for a credit of $2.59. Note the areas of maximum profit or loss at expiration, as well as the break-even points above and below the short strikes. Let’s look at an iron condor example to help explain.įIGURE 1: IRON CONDOR RISK PROFILE. It sounds like you’re able to bring in the premium for two spreads without increasing your risk, right? Well, yes and no. So at expiration, only one spread can go against you. But the market can’t be in two places at once. Think about it this way: Selling two different OTM vertical spreads means collecting the premiums from both sides of the iron condor as one order. This doesn’t necessarily mean you’ll have a successful trade, but at least you’ll have a rational framework to work from. You could randomly pick some prices, or you can take a little bit of Goldilocks wisdom, throw in some trader math, and come up with potential strike prices to use in your iron condor options strategy. The iron condor is what you get when you combine an out-of-the-money (OTM) short put spread (bullish strategy) and an OTM short call spread (bearish strategy) using options that all expire on the same date. See figure 1 for the risk profile.īut which strike prices do traders typically use for the two spreads? Iron condor strike selection may take some getting used to. ![]() Sure, it might sound like a high school garage band or maybe a video game “super boss.” But when you open up the hood of the iron condor strategy, it’s really a combination of two fairly common options strategies, coupled with one awesome-sounding name. Iron Condor: What’s in a Name?ĭon’t be intimidated by this options strategy. It is not, and should not be considered, individualized advice or a recommendation. The following, like all of our strategy discussions, is strictly for educational purposes. But what if your viewpoint is neutral, or if the underlying stock seems stuck in a range-bound market? Enter the iron condor. Plus, when selling verticals, the risk is defined: It’s limited to the width of the long and short strikes minus the premium collected (and minus transaction costs). ![]() Selling a call vertical spread would be a bearish trade. Selling a put vertical spread would be a bullish trade. Vertical credit spreads are fairly versatile for taking a directional stance. But seeking favorable probabilities and exercising prudent risk management can help create a winning strategy. ![]() Active traders understand it’s impractical to expect every options trade to be profitable. Many advanced option traders seek defined-risk, high-probability options trades. Because an iron condor has four legs, it’s important to consider transaction costs.To profit from a short iron condor, the underlying stock must stay within a range of prices until expiration or until the spread is closed out.A short iron condor options position combines a short out-of-the-money put spread and a short out-of-the-money call spread.
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