iron condor options strategy

Submitted by admin on Mon, 11/08/2021 - 18:46

Iron condor is one of the most popular options strategies. If stock price moves between upper limit and lower limit (between B and C in the performance graph below), stock traders will make a profit.

iron condor options performance graph

As shown in the performance graph above, its profit range is quite extended. That's why it is called iron condor.

condor

The best underlining asset for iron condor options is index ETF, such as SPY, QQQ, VOO. Stock traders can also practice iron condor options on individual stocks. However, individual stock could be volatile for any reason. Traders are prone to lose money using iron condor options if a stock becomes volatile.

When traders sell the call and put spreads, they are buying the iron condor. The premium collected represents the maximum profit for iron condor options.

Sell call option at strike price C.

Buy call option at strike price D.

These two options combined to a call spread options.

 

Sell put option at strike price B.

Buy put option at strike price A.

These two options combined to a put spread options.

 

These 4 options combined to one iron condor options.

 

The best reason for using iron condor options is its low margin requirement. Iron condor options requires much less margin than call spread or put spread alone. Usually, iron condor options requires only 50% of margin of either call spread or put spread options if both sides are the same width.  However, If not, then the buying power requirement will use the wider side.

When stock price moves between B and C on strike day, traders make a profit.

If stock price comes to challenge either the upper limit C or lower limit B, we can change the options to a butterfly option strategy to minimize loss.

 

MAXIMUM GAIN

  • (Lowest, short call strike – lowest, long call strike) – Net premium paid

 

MAXIMUM LOSS

  • Net premium paid

 

 

Summary

Iron condors allow you to invest in the stock market with a neutral bias, something that many traders find quite comfortable. This options strategy also allows you to own positions with limited risk and a high probability of success.