Iron Condor Combo Overview

Some people buy stocks because they want to make a profit when prices rise, and some people sell securities because they predict prices will fall。But what about investors who think the market will remain largely unchanged？One way they earn a return is by using options。Specifically, by using a strategy called "Iron Condor"。

The name comes from a chart showing its potential profits and losses, similar to a bird with open wings.。Some traders use them like iron vultures because they have limited theoretical risk - but that can also mean limited potential profits。

Iron Condor is a multi-legged options trading strategy consisting of four different option contracts designed to make a profit when the underlying stock remains within a certain price range。If you're familiar with options trading, you might think of the Iron Condor as a combination of selling call credit spreads and selling put credit spreads。 

Build an iron vulture portfolio: first, build a bullish credit spread above the current share price。For example, you can sell a call option with a strike price of $110 and get a $2 royalty; then you buy a call option with a strike price of $120 and pay $1。The net credit of the call credit spread is $2 - $1 = $1.。

Next construct the other half, the put option credit spread。Suppose you sell a put option with a strike price of $90 and get a $2 premium; you also buy a put option with a strike price of $80 and pay $1。Note that the strike price of both put options is lower than the current share price。The net credit for a put credit spread is $2 - $1 = $1。All options (call and put) expire on the same day, that is, two months from the date of your purchase。

Risk / reward: The biggest profit you get from selling iron vultures is the premium you charge for the entire package。As an example, you charge $1 for the spread of a call option and $1 for the spread of a put option, for a total net credit of $2 (the option controls 100 shares and the standard multiplier is 100, so your total net credit will be $200)。This profit is only made when all options expire, so Condor Inc..The share price must remain between $90 and $110 at maturity.。

The biggest loss from the sale of an iron vulture is the difference between the strikes minus the credit you get from selling the entire iron vulture (excluding exercise / transfer risk)。In this example, the maximum width of each spread is $10 (110 / 120 call spread; 80 / 90 put spread; each spread totals $1,000)。At the same time, you will get a $2 ($200 per price) premium for selling the entire iron vulture, which means that the maximum theoretical loss for the entire strategy is $8, or $800 per spread ($10 - $2 = $8 x 100 = $800)

Break-even: There are two break-even points due to the sale of two different credit spreads。The break-even price at maturity of such a strategy is the short exercise price plus / minus the credit received.。On the call side, this is your short $110 call plus your total credit of $2; on the put side, this is your short $90 put minus the credit of $2。This means that in order to break even on at least this trade, the stock must remain between $88 and $112 at maturity.。

If the stock trades between the break-even price and the long-term exercise price of your credit spread, you will begin to bear the loss。In this example, the loss of the bullish side (not the maximum loss) will occur at 112.between $01 and $120, and 87.between $99 and $80。Any amount in excess of $80 and $120 incurs the maximum theoretical loss。

To open a position: To open an iron vulture, you need to enter an order and sell both call and put credit spreads as a whole。Keep in mind that if you decide to sell one of these credit spreads first, or buy and sell four separate options separately, you will be "tied" to the iron vulture, which can change the potential risk / reward of the iron vulture。If you are unable to fill one of the credit spreads, or an option in the credit spread, you may hold a position you did not intend to hold.。When trading iron vultures, it is best to use limit orders to submit your open order as a whole。

Closing: If the underlying stock closes between $90 and $110 at maturity, both credit spreads will become worthless at maturity, and you will retain the $2 premium charged ($200 in total)。

If the stock closes below $80 or above $120 at maturity, you will bear the maximum theoretical loss of $8 per spread。In this case, one side of the iron vulture will expire and be worthless, while the other side will trade at the highest value ($10)。Don't forget that the $2 premium you charge will offset some of the $10 loss。For maximum value credit spread trades, you can try to buy back the spread before expiration for maximum loss, or allow your broker to exercise and distribute your in-the-money options。Be sure to consult your broker to understand how and when options will be automatically exercised / allocated in your account。

In general, most options traders will close the spread before expiration like an iron vulture, even if it looks worthless at expiration。You can do this by "buying off" iron vultures。If the buy price is less than the sell price, you will make a profit; if the buy price is greater than the sell price, you will make a profit and suffer a loss.。This ensures that you avoid any unnecessary risks from potential exercises or tasks。

At maturity, the stock closes between the short and long strike price of any of your credit spreads, then you may end up holding a long or short position in 100 shares of the stock。In this example, if the closing price of the put option at the expiration of the stock is 89.Between $99 and $80, the call option closes at 110.Between $01 and $120, this happens。

If this happens, your potential risk / reward profile will completely change and take the risk of 100 shares。The maximum gain / loss discussed above is no longer applicable。In addition, allocations usually occur over the weekend, which means that if the stock jumps up or down on Monday morning, your account can experience huge losses (depending on your long or short stock position), so check your position often。

Terminology Introduction

Before you dive into how the Iron Condor strategy works, it's helpful to know some vocabulary related to options trading:

• An option is a contract that allows you to buy (if a call option) or sell (if a put option) a security (usually a stock) at a specific price before the expiration date。
  The strike price is the price at which the option owner can buy or sell the underlying security before expiration.。
  A call option allows you to buy a security at the strike price, and a put option allows you to sell the security at that price.。
  A call or put spread involves buying and selling options of the same class that expire on the same day but have different strike prices.。

The Iron Condor involves selling two credit spreads, which make up the bird's two "wings":

• The call spread means that you buy one call option and sell another.。Both have the same expiration date, but one has a higher execution price than the other.。
  The put spread means that you buy the put option and sell the put option at the same time.。Again, both expire on the same day, but one has a higher strike price than the other。
  The width of the spread is the difference between the strike price of the call or put option spread.。

Usually, when you sell an iron vulture, you choose an option that is "out of the price."。In the case of call options, this means that their strike price is higher than the market price of the underlying security; in the case of put options, this means that the strike price is lower than the market price of the security, which means that when you sell iron vultures, the option has no intrinsic value。

Advantages and disadvantages of trading iron vultures

Iron Condor is a commonly used option strategy, and the advantages and disadvantages coexist。

Advantages

• They usually have a high theoretical probability of success (all four options expire worthless)。
  They are defined by risk (theoretically the maximum loss is limited at the entry of the trade)。
  They are neutral, you don't care about the stock going up or down, you only care about it staying in a range。
  They are short or will lose value over time (hope all four options expire worthless)。

Disadvantages

• If the stock moves far enough (up or down), your position will start to suffer, and trending stocks are not a good fit for the Iron Condor portfolio。
  A short iron vulture is implied volatility。If implied volatility increases, the value of all four options may increase (even if the stock does not move)。

Options trading carries significant risk and is not suitable for all investors, and certain complex options strategies carry additional risk。Options strategies that require multiple purchases and sales of options incur additional costs compared to a single option transaction。Investors should definitely consider their investment objectives and risks carefully before trading options.。