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iron condor

July 23, 2015

The iron condor credit spread strategy is used by stock market traders when they feel that a share is going to trade sideways for a certain amount of time. Perhaps they expect small fluctuations up and down in the underlying stock price, however over another 30 days price action will remain relatively unchanged. When here is the case, equity option trades can take advantage of what is known as time decay, or positive theta. What theta represents may be the decay in the worthiness of an out-of-the-money option as its expiration date approaches. The iron condor setup is simply the combination of a bull put spread and a bear call spread.stock options trading

This trade is set up by selling out-of-the-money options and purchasing further out-of-the-money-options. Once structured, the trade will get a net credit as the sold options generate a higher premium than the cost of the purchased options. As time decay continues to wear at the worthiness of most options, the trade could possibly become profitable. However, sharp moves by the underlying stock to the upside or downside may cause the positioning to become a loss. The further out of the money the purchased choices are, the more the risk versus reward setup will increase. Simply, the more risk you accept for the trade, the more credit you can potentially receive at expiration.

We will now set up an example of a metal condor trade and how to implement one. Let's suggest that Apple (AAPL) is trading at $620 per tell 41 days to go until expiration. We believe it is highly probable that the stock will soon be trading between $580 and $640 at expiration. When we focus on the bull put spread, we'd want to buy the 580 put strike choice for $4.40 and sell the 590 put strike choice for $6.00. Thus giving us a net credit of $1.60. Next, we'd complete the iron condor position by setting up a bear call spread. To do this, we'd buy the 660 call strike choice for $4.25 and sell the 650 call strike choice for $6.20. This will give us a net credit of $1.95.options market

To calculate our overall risk and reward, we'd simply accumulate our total credits from each spread, which gives us $3.55. To calculate our risk for the trade, we'd subtract the credit received from the sum total difference in strike prices. Inside our example would subtract $3.55 from $10.00, which gives us an overall total of $6.45 of risk. Therefore, we could calculate this trade provides the potential to make $3.55 for each and every $6.45 we risk. Since one option contract represents 100 shares of the underlying stock, we've the ability to profit $355 at expiration while risking $645. Therefore, if Apple stock is trading between $590 and $650 per share at expiration this trade will soon be fully profitable.

The condor strategies are great to make use of in markets which are not experiencing plenty of volatility and neither the bulls nor the bears have a dominant stranglehold on the market. It is highly suggested never to execute a metal condor on a share when earnings will occur within the time period of the trade being open. Earnings are one of the single biggest drivers of stock price movements. Always be sure to check for upcoming earnings on the company you are considering opening this trade on. Also, be sure to identify clear levels of support and resistance, as these can help identify high probability areas with which to create your iron condor. Identifying the right times to open this type of trade allows a trade to profit when a share is trending sideways. Because this is so often the case with markets, to be able to properly execute the iron condor strategy is crucial to being truly a successful options trader.

 

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