Iron Condor

What Is an Iron Condor?

An iron condor is a options strategy comprising of two puts (one long and one short) and two calls (one long and one short), and four strike prices, all with a similar expiration date. The iron condor acquires the maximum profit when the underlying asset closes between the middle strike prices at expiration. At the end of the day, the goal is to profit from low volatility in the underlying asset.

The iron condor has a comparative payoff as a customary condor spread, yet utilizes the two calls and puts rather than just calls or just puts. Both the condor and the iron condor are extensions of the butterfly spread and iron butterfly, individually.

Grasping an Iron Condor

The iron condor strategy has limited upside and downside risk on the grounds that the high and low strike options, the wings, safeguard against critical moves in one or the other course. As a result of this limited risk, its profit potential is likewise limited.

For this strategy, the trader in a perfect world would like the options to lapse worthlessly, which is all main conceivable if the underlying asset closes between the middle two strike prices at expiration. There will probably be a fee to close the trade in the event that it is fruitful. On the off chance that it isn't effective, the loss is as yet limited.

The commission can be a prominent factor as there are four options included.

The construction of the strategy is as follows:

1. Buy one out of the money (OTM) put with a strike price below the current price of the underlying asset. This OTM put option will safeguard against a critical downside move to the underlying asset.
2. Sell one OTM or at the money (ATM) put with a strike price closer to the current price of the underlying asset.
3. Sell one OTM or ATM call with a strike price over the current price of the underlying asset.
4. Buy one OTM call with a strike price further over the current price of the underlying asset. This OTM call option will safeguard against a significant upside move.

The options that are further OTM, called the wings, are both long positions. Since both of these options are further OTM, their premiums are lower than the two written options, so there is a net credit to the account while setting the trade.

By choosing different strike prices, it is feasible to make the strategy lean bullish or bearish. For instance, in the event that both the middle strike prices are over the current price of the underlying asset, the trader expects a small rise in its price by expiration. Regardless, the trade actually conveys a limited reward and limited risk.

Iron Condor Profits and Losses

The maximum profit for an iron condor is the amount of premium, or credit, received for making the four-leg options position.

The maximum loss is likewise capped. The maximum loss is the difference between the long call and short call strikes, or the long put and short put strikes. Reduce the loss by the net credits received, however at that point add commissions to get the total loss for the trade.

The maximum loss happens assuming the price moves over the long call strike, which is higher than the sold call strike, or below the long put strike, which is lower than the sold put strike.

Illustration of an Iron Condor

Accept that an investor trusts Apple Inc. will be somewhat flat in terms of price over the course of the next two months. They choose to execute an iron condor, with the stock currently trading at $212.26.

They sell a call with a $215 strike, which gives them $7.63 in premium and buy a call with a strike of $220, which costs them $5.35. The credit on these two legs is $2.28, or $228 for one contract — every options contract, put or call, compares to 100 shares of the underlying asset. However, the trade is just half complete.

Likewise, the trader sells a put with a strike of $210, bringing about a premium received of $7.20, and buys a put with a strike of $205, costing $5.52. The net credit on these two legs is $1.68, or $168 if trading one contract on each.

The total credit for the position is $3.96 ($2.28 + $1.68), or $396. This is the maximum profit the trader can make and happens on the off chance that every one of the options terminate worthless, and that means the price must be somewhere in the range of $215 and $210 when expiration happens in two months. In the event that the price is above $215 or below $210, the trader may as yet create a reduced gain, however could likewise lose money.

One method for thinking of an iron condor is having a long strangle inside of a bigger, short strangle — or the other way around.

The loss gets bigger assuming the price of Apple stock methodologies the upper call strike ($220) or the lower put strike ($205). The maximum loss happens if the price of the stock trades above $220 or below $205.

Expect the stock at expiration is $225. This is over the upper call strike price, and that means the trader is facing the maximum conceivable loss. The sold call is losing $10 ($225 - $215) while the bought call is making $5 ($225 - $220). The puts terminate. The trader loses $5, or $500 total (100 share contracts), however they additionally received $396 in premiums. Hence, the loss is capped at $104 plus commissions.

Presently, accept the price of Apple rather dropped, yet not below the lower put threshold. It tumbles to $208. The short put is losing $2 ($208 - $210), or $200, while the long put lapses worthless. The calls likewise terminate. The trader loses $200 on the position however gets $396 in premium credits. Accordingly, they actually make $196, less commission costs.

Highlights

• An iron condor is a delta-nonpartisan options strategy that profits the most when the underlying asset doesn't move a lot, albeit the strategy can be modified with a bullish or bearish bias.
• Like an iron butterfly, an iron condor is made out of four options of a similar expiration: a long put farther of the money (OTM) and a short put closer to the money, and a long call further OTM and a short call closer to the money.
• Profit is capped at the premium received while the potential loss is capped at the difference between the bought and sold call strikes and the bought and sold put strikes — less the net premium received.

FAQ

What Is the Riskiest Option Strategy?

Selling call options on a stock that isn't owned is the riskiest option strategy. This is otherwise called composing a naked call and selling an uncovered call. On the off chance that the price of the stock goes over the strike price, the risk is that somebody will call the option. At the point when they do, and you don't have the stock, you need to buy it at the market price and sell it at the lower strike price. Your risk is unlimited as the price of the stock at market might have gone up with next to no limit, theoretically.

Are Iron Condors Profitable?

Indeed, iron condors can be profitable. An iron condor will be most profitable while the closing price of the underlying asset is between the middle strike prices at expiration. An iron condor profits from low volatility in the underlying asset.

What Is an Iron Condor Example?

An iron condor model would be the point at which a 75-80 bull put spread is combined with a 95-100 bear call spread. This makes a short iron condor: the difference is 15 points for the strike price of the short options and five points for the two spreads.