iron condor



The iron condor credit spread strategy is used by stock market traders when they genuinely believe that an investment will trade sideways for a certain amount of time. Perhaps they expect small fluctuations up and down in the underlying stock price, however over the next 30 days price action will remain relatively unchanged. When this is the case, equity option trades can take advantage of what is recognized as time decay, or positive theta. What theta represents may be the decay in the value of an out-of-the-money option as its expiration date approaches. The iron condor setup is merely the mixture of a bull put spread and a bear call spread.iron condor
This trade is established by selling out-of-the-money options and purchasing further out-of-the-money-options. Once structured, the trade will receive a net credit as the sold options make a greater premium than the price of the purchased options. As time decay continues to wear at the value of options, the trade could become profitable. However, sharp moves by the underlying stock to the upside or downside can cause the career to become a loss. The further from the money the purchased options are, the more the danger versus reward setup will increase. Simply, the more risk you accept for the trade, the more credit you can potentially receive at expiration.
We shall now set up a good example of a metal condor trade and just how to implement one. Let's declare that Apple (AAPL) is trading at $620 per share with 41 days to go until expiration. We still find it highly probable that the stock will be trading between $580 and $640 at expiration. When we start with the bull put spread, we would want to purchase the 580 put strike selection for $4.40 and sell the 590 put strike selection for $6.00. This provides us a net credit of $1.60. Next, we would complete the iron condor position by establishing a bear call spread. To do this, we would purchase the 660 call strike selection for $4.25 and sell the 650 call strike selection for $6.20. This could give us a net credit of $1.95.options trading
To calculate our overall risk and reward, we would simply mount up our total credits from each spread, gives us $3.55. To calculate our risk for the trade, we would subtract the credit received from the sum total difference in strike prices. Within our example would subtract $3.55 from $10.00, gives us a total of $6.45 of risk. Therefore, we could calculate this trade offers the potential to create $3.55 for each $6.45 we risk. Since one option contract represents 100 shares of the underlying stock, we have 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 be fully profitable.
The condor strategies are great to utilize in markets that 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 an investment when earnings will occur within the period of time of the trade being open. Earnings are one of many single biggest drivers of stock price movements. Always make sure you check for upcoming earnings on the organization you're considering opening this trade on. Also, make sure you identify clear quantities of support and resistance, as these can help identify high probability areas with which to setup your iron condor. Identifying the right times to open this type of trade allows a trade to profit when an investment is trending sideways. Because that is so the case with markets, being able to properly execute the iron condor strategy is vital to being fully a successful options trader.