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Iron Condor Spread...

Iron Condor Profit Loss Graph

Combine an out of the money Bear Call Credit Spread and Bull Put Credit Spread on the same stock or index with the same expiration for all options. Iron Condor Spread is a neutral strategy. The maximum profit is achieved if the stock stays between the short (sold) call and the short put strike prices. The maximum risk is equal to the differences in strike prices on one side of the spread minus the net credit. Most investors trade Iron Condor Spread strategies on the indexes as there is lower chance of a sudden change in price.

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.

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).

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).

You 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.

The upper break even is the sold call strike price plus the total net credit.

The lower break even is the sold put strike price minus the total net credit.

A profit is realized at any price above the lower break even or below the upper break even at expiration.

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
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:
Iron Condor - Iron Condor Spreads 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 during iron condor investing 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 during an iron condor spread 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 with an iron condor option trade(uncovered position).
Cautions with the Iron Condor Spread 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 iron condor option 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 iron condor spread traders do this when the short option is near-the-money.
If you have closed the short option half of the iron condor option 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.


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