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Iron Condor Spread...
The Iron Condor Spread strategy is a neutral strategy similar to the Iron Butterfly. In the Iron Condor, an investor will combine a Bear-Call Credit Spread and a Bull-Put Credit Spread on the same underlying security. By doing this, an investor will potentially be able to double the credit obtained over a single spread position. Since there are two spreads involved in the strategy (four options), there is an upper break even and a lower break even. A profit is made if the stock remains above the lower break even point or below the upper break even point.
Iron Condor - Iron Condor Spreads Enter a Bear-Call Credit Spread (Sell a Call at or out-of-the-money. Buy a Call one or more strikes above sold Call in the same target month).
Iron Condor Option Spreads Enter a Bull-Put Credit Spread in the same month, on the same stock (Sell a Put at or out-of-the-money. Buy a Put one or more strikes lower than Sold Put in the same target month).
Iron Condor - Iron Condor Spreads An investor will receive a net credit from both positions. The total net credit is the max. profit. The max. profit is earned if the stock price remains above the sold put strike and below the sold call strike.
Iron Condor Option Spreads The upper break even is the sold call strike price plus the total net credit.
Iron Condor - Iron Condor Spreads The lower break even is the sold put strike price minus the total net credit.
Iron Condor Option Spreads A profit is realized at any price above the lower break even or below the upper break even.
Iron Condor - Iron Condor Spreads The max. risk is the difference in strike prices on either spread minus the net credit.
The return calculations for the Iron Condor Spread are:
% Assnd = (Total Net Credit ÷ Margin for the spread) * 100
Where:
Total Net Credit = Credit from Bull Put Spread + Credit from Bear Call Spread
Margin = (Diff in Strikes Bull-Put Spread OR Diff in Strikes Bear-Call Spread whichever is greater) - Net Credit
Example: Index $XYZ at $146.32 per share.
Enter a 120 and 130 strike Bull Put Credit Spread:
Buy SEP 120 Put for $0.15
Sell SEP 130 Put for $0.35
For a Credit of $0.20
Enter a 160 and 170 strike Bear-Call Credit Spread:
Buy SEP 170 Call for $0.20
Sell SEP 160 Call for $0.70
For a credit of $0.50
Total Net Credit = ($0.20) + ($0.50) = $0.70
% Return = (Total Net Credit ÷ Margin) * 100
% Return = $0.70 ÷ [(130-120) - 0.70] * 100
= (0.70) ÷ [10 - 0.70] * 100
= 0.70 ÷ 9.30 * 100 = 7.5%
Max. Profit = Total Net Credit = $0.70
Max. Risk = (Maximum Difference in Strikes - Total Net Credit)
Max. Risk = 10 - 0.70 = $9.30
Lower Break Even = Sold Put Strike - Total Net Credit = 130 - 0.70 = $129.30
Upper Break Even = Sold Call Strike + Total Net Credit = 160 + 0.70 = $160.70

Advantages of this strategy:
This is a NEUTRAL strategy. A profit can be realized anywhere above the lower break even and below the upper break even.
The double credit achieved helps lower the potential risk.
The risk can be controlled by setting your spreads further OTM.
Potential returns are increased over a single Bear-Call or Bull-Put spread.
Losses are limited if the stock goes against you one way or the other.
If you are facing a large gain or drop in the underlying you could only close one leg of the four legs in the position.
No stock is actually owned (uncovered position).

Cautions with this strategy:
Commission costs to open the position are higher since there are four trades, might be cost prohibitive to trade iron condors that are low net credits.
The credit you receive for the trade is generally much smaller than the max risk of the trade, therefore it is prudent to close the short option before the position is at max loss. Many traders do this when the short option is near-the-money.
If you have closed the short option half of the trade you may want to consider holding the long option to possibly profit from continued directional momentum in the underlying. However, the danger is that the underlying will correct and whipsaw in the other direction.

Iron Condor - Trading Iron Condor Spreads - Iron Condor Option Spreads


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