The iron condor credit spread strategy is used by stock market traders once they feel that a stock is going to trade sideways for a specific amount of time. Perhaps they expect small fluctuations up and down in the underlying stock price, however over the following 30 days price action will remain relatively unchanged. When this is actually the case, equity option trades can take advantage of what is known as time decay, or positive theta. What theta represents could be the decay in the value 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.options market
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 since the sold options bring in a greater premium than the expense of the purchased options. As time decay continues to wear at the value of options, the trade could possibly become profitable. However, sharp moves by the underlying stock to the upside or downside will cause the career to become loss. The further from the money the purchased choices are, the more the chance versus reward setup will increase. Simply, the more risk you undertake for the trade, the more credit you can potentially receive at expiration.iron condor
We shall now create a good example of a metal condor trade and how to implement one. Let's claim that Apple (AAPL) is trading at $620 per tell 41 days to go until expiration. We believe that it is highly probable that the stock will undoubtedly be trading between $580 and $640 at expiration. When we start with the bull put spread, we would want to get the 580 put strike option for $4.40 and sell the 590 put strike option for $6.00. This gives us a net credit of $1.60. Next, we would complete the iron condor position by establishing a bear call spread. To get this done, we would buy the 660 call strike option for $4.25 and sell the 650 call strike option for $6.20. This might give us a net credit of $1.95.
To calculate our overall risk and reward, we would simply add up our total credits from each spread, which gives us $3.55. To calculate our risk for the trade, we would subtract the credit received from the full total difference in strike prices. Within our example would subtract $3.55 from $10.00, which gives us an overall total of $6.45 of risk. Therefore, we are able to calculate this trade provides the potential to create $3.55 for every single $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 undoubtedly be fully profitable.