c




From Wikipedia, the free encyclopedia

Jump to: navigation, search

The c


is an advanced option trading strategy utilising two vertical spreads ± a Bull
Put Spread and a Bear Call Spread with the same expiration. The number of call spreads will be
equal to the number of put spreads.

The position is so named due to the shape of the profit/loss graph, which loosely resembles a
large-bodied bird, such as a condor. In keeping with this analogy, traders often refer to the inner
options collectively as the "body" and the outer options as the "wings". The word c
 in the
name of this position indicates that, like an Iron Butterfly, this position is played across the
current spot price of the underlying instrument having one vertical spread below and one vertical
spread above the current spot price. This distinguishes the position from a plain Condor position,
which would be played with all strikes above, or below the current spot price of the underlying
instrument. A Call Condor would be played with all call contracts and a Put Condor would be
played with all put contracts.

One of the practical advantages of an Iron Condor over a single vertical spread (a put spread or
call spread), is that the initial and maintenance margin requirements[1] for the Iron Condor is
often the same as the margin requirements for a single vertical spread, yet the Iron Condor offers
the profit potential of two net credit premiums instead of only one. This can significantly
improve the potential rate of return on capital risked when the trader doesn't expect the
underlying instrument's spot price to change significantly.

Another practical advantage of the Iron Condor is that if the spot price of the underlying is
between the inner strikes towards the end of the option contract, the trader can avoid additional
transaction charges by simply letting some or all of the options contracts expire. If the trader is
uncomfortable, however, with the proximity of the underlying's spot price to one of the inner
strikes and/or is concerned about pin risk, then the trader can close one or both sides of the
position by first re-purchasing the written options and then selling the purchased options.


 
[hide]

O 1 Long Iron Condor

 1.1 Related Strategies
O ÿ Short Iron Condor
 ÿ.1 Related Strategies
O  References
0

 c




Profit/loss graph for a long Iron Condor at expiration.

To buy or "go Long" an Iron Condor, the trader will buy (long) options contracts for the outer
strikes using an out-of-the-money put and out-of-the-money call. The trader will also sell or
write (short) the options contracts for the inner strikes, again using an out-of-the-money put and
out-of-the-money call. The difference between the put contract strikes will generally be the same
as the distance between the call contract strikes.

Since the premium earned on the sales of the written contracts is very likely greater than the
premium paid on the purchased contracts, a long Iron Condor is typically a net credit transaction.
This net credit represents the maximum profit potential for an Iron Condor.

The potential loss of a Long Iron Condor is the difference between the strikes on either the call
spread or the put spread (whichever is greater if it is not balanced) multiplied by the contract size
(typically 100 or 1000 shares of the underlying instrument), less the net credit received.

A trader who buys an Iron Condor speculates that the spot price of the underlying instrument will
be between the short strikes when the options expire where the position is the most profitable.
Thus, the Iron Condor is an options strategy considered when the trader has a neutral outlook for
the market.

The long Iron Condor is an effective strategy for capturing any perceived excessive volatility risk
premium[ÿ], which is the difference between the realized volatility of the underlying and the
volatility implied by options prices.

Buying Iron Condors are popular with traders who seek regular income from their trading
capital. An Iron Condor buyer will attempt to construct the trade so that the short strikes are
close enough that the position will earn a desirable net credit, but wide enough apart so that it is
likely that the spot price of the underlying will remain between the short strikes for the duration
of the options contract. The trader would typically play Iron Condors every month (if possible)
thus generating monthly income with the strategy.

0
 
 
An option trader who considers a Long Iron Condor is one who expects the price of the
underlying instrument to change very little for a significant duration of time. This trader might
also consider one or more of the following strategies.

O A short St  is effectively a long Iron Condor, but without the wings. It is
constructed by writing an out-of-the-money put and an out-of-the money call. A short
Strangle with the same short strikes as an Iron Condor is generally more profitable, but
unlike a long Iron Condor, the short Strangle offers no protection to limit losses should
the underlying instrument's spot price change dramatically.

O A long c
 tt

 is very similar to a long Iron Condor, except that the inner, short
strikes are at the same strike. The Iron Butterfly requires the underlying instrument's spot
price to remain virtually unchanged over the life of the contract in order to retain the full
net credit, but the trade is potentially more profitable (larger net credit) than an Iron
Condor.

O A short St  is effectively a long Iron Butterfly without the wings and is constructed
simply by writing an at-the-money call and an at-the-money put. Similar to a short
Strangle, the short Straddle offers no protection to limit losses and similar to a long Iron
Butterfly, the Straddle requires the underlying instrument's spot price to remain virtually
unchanged over the life of the contract in order to retain the full net credit.

O A   tSp  is simply the lower side of a long Iron Condor and has virtually
identical initial and maintenance margin requirements.

O A  Sp  is simply the upper side of a long Iron Condor and has virtually
identical initial and maintenance margin requirements.

0

c




Profit/loss graph for a short Iron Condor at expiration.

To sell or "go Short" an Iron Condor, the trader will buy (long) options contracts for the inner
strikes using an out-of-the-money put and out-of-the-money call options. The trader will then
also sell or write (short) the options contracts for the outer strikes.
Since the premium earned on the sales of the written contracts is very likely less than the
premium paid for the purchased contracts, a short Iron Condor is typically a net debit transaction.
This debit represents the maximum potential loss for the short Iron Condor.

The potential profit for a short Iron Condor is the difference between the strikes on either the call
spread or the put spread (whichever is greater if it is not balanced) multiplied by the size of each
contract (typically 100 or 1000 shares of the underlying instrument) less the net debit paid.

A trader who Sells an Iron Condor speculates that the spot price of the underlying instrument
will not be between the short strikes when the options expire. If the spot price of the underlying
is less than the outer put strike, or greater than the outer call strike at expiration, then the short
Iron Condor trader will realise the maximum profit potential.

0
 
 

An option trader who considers a Short Iron Condor strategy is one who expects the price of the
underlying to change greatly, but isn't certain of the direction of the change. This trader might
also consider one or more of the following strategies.

O A St  is effectively a short Iron Condor, but without the wings. It is constructed by
purchasing an out-ot-the-money put and an out-of-the money call. While the short Iron
Condor is a less expensive trade (smaller net debit), the Strangle does not restrict profit
potential in the case of a dramatic change in the spot price of the underlying instrument.

O A short c
 tt

 is very similar to a short Iron Condor, except that the inner, long
strikes are at the same strike. The resulting position requires the underlying's spot price to
change less before there is a profit, but the trade is typically more expensive (larger net
debit) than a short Iron Condor.

O A St  is effectively a short Iron Butterfly without the wings and is constructed

simply by purchasing an at-the-money call and an at-the-money put. Similar to the
Strangle, the Straddle offers a greater profit potential at the expense of a greater net debit.

O A   tSp  is simply the lower side of a short Iron Condor and has virtually
identical initial and maintenance margin requirements.

O A  Sp  is simply the upper side of a short Iron Condor and has virtually
identical initial and maintenance margin requirements.


c




The iron condor is a limited risk, non-directional option trading strategy that is designed to have
a large probability of earning a small limited profit when the underlying security is perceived to
have low volatility. The iron condor strategy can also be visualized as a combination of a bull put
spread and a bear call spread.

Using options expiring on the same expiration month, the option trader creates an iron condor by
selling a lower strike out-of-the-money put, buying an even lower strike out-of-the-money put,
selling a higher strike out-of-the-money call and buying another even higher strike out-of-the-
money call. This results in a net credit to put on the trade.






maximum gain for the iron condor strategy is equal to the net credit received when entering the
trade. maximum profit is attained when the underlying stock price at expiration is between the
strikes of the call and put sold. At this price, all the options expire worthless.

The formula for calculating maximum profit is given below:

O max Profit = Net Premium Received - Commissions Paid

O max Profit Achieved When Price of Underlying is in between Strike Prices of the Short
Put and the Short Call





maximum loss for the iron condor spread is also limited but significantly higher than the
maximum profit. It occurs when the stock price falls at or below the lower strike of the put
purchased or rise above or equal to the higher strike of the call purchased. In either situation,
maximum loss is equal to the difference in strike between the calls (or puts) minus the net credit
received when entering the trade.

The formula for calculating maximum loss is given below:

max Loss = Strike Price of Long Call - Strike Price of Short Call - Net Premium
O
Received + Commissions Paid
O max Loss Occurs When Price of Underlying >= Strike Price of Long Call OR Price of
Underlying <= Strike Price of Long Put

˜ 

 
 There are ÿ break-even points for the iron condor position. The breakeven points can be
calculated using the following formulae.

O Upper Breakeven Point = Strike Price of Short Call + Net Premium Received
O Lower Breakeven Point = Strike Price of Short Put - Net Premium Received

§ 
Suppose XYZ stock is trading at $45 in June. An options trader executes an iron condor by
buying a JUL 5 put for $50, writing a JUL 40 put for $100, writing another JUL 50 call for
$100 and buying another JUL 55 call for $50. The net credit received when entering the trade is
$100, which is also his maximum possible profit.

On expiration in July, XYZ stock is still trading at $45. All the 4 options expire worthless and
the options trader gets to keep the entire credit received as profit. This is also his maximum
possible profit.

If XYZ stock is instead trading at $5 on expiration, all the options except the JUL 40 put sold
expire worthless. The JUL 40 put has an intrinsic value of $500. This option has to be bought
back to exit the trade. Thus, subtracting his initial $100 credit received, the options trader suffers
his maximum possible loss of $400. This maximum loss situation also occurs if the stock price
had gone up to $55 instead.

To further see why $400 is the maximum possible loss, lets examine what happens when the
stock price falls to $0 on expiration. At this price, both the JUL 5 put and the JUL 40 put
options expire in-the-money. The long JUL 5 put has an intrinsic value of $500 while the short
JUL 40 put is worth $1000. Selling the long put for $500, he still need $500 to buy back the short
put. Subtracting the initial credit of $100 received, his loss is still $400.

6
t
 t 

tt tt 
 t
t

pt
t



 pp 
pt

pt

pt


t 





 
Commission charges can make a significant impact to overall profit or loss when implementing
option spreads strategies. Their effect is even more pronounced for the iron condor as there are 4
legs involved in this trade compared to simpler strategies like the vertical spreads which have
only ÿ legs.

If you make multi-legged options trades frequently, you should check out the brokerage firm
OptionsHouse.com where they charge a low fee of only $0.15 per contract (+$8.95 per trade).



  
 
 The following strategies are similar to the iron condor in that they are also low volatility
strategies that have limited profit potential and limited risk.

 c



The converse strategy to the iron condor is the reverse or short iron condor. Short iron condors
are used when one perceives the volatility of the price of the underlying stock to be high.


   
The iron condor spread belongs to a family of spreads called wingspreads whose members are
named after a myriad of flying creatures.