The long OTM puts and calls are simply bought as protection. Iron condor trading requires the stock price to stay within a specific price range. iron condor have the same characteristic. The profit/loss diagram of an iron condor trade is similar to a large bird with wings. We’ve made $400 on our buy options and lost $200 on the sell options. Since we bought these options and they expired worthless we lose the premium.Īdding all of the PnL together it totals to a net profit of $200. We realized a loss of $100 from our $70 OTM calls and another additional loss of $100 from our $40 OTM puts. However, we also lost some money on the options we bought as protection. And since the options expire is worthless, we got to keep that credit. Because we’re short these options and they are now at zero, we collect the credit. We will make a profit of $200 from our $65 OTM calls and another additional $200 from our $45 OTM puts. If all of these options are worthless, how can we profit then? As we’re near the expiration, these options remain out of the money and the price of each option gradually goes to zero. During this time period, the stock hasn’t moved much and just kind of consolidates in a tight range. Let’s assume the time has passed and we’re near the 30-day expiration. The downside is that you need to keep up with all these individual option trades. In this regard, we also need to buy further out of the money options like buying the $70 OTM calls for $1 and simultaneously buy the $40 OTM puts for $1. However, since naked options theoretically have unlimited risk, we need to buy some protection and construct our iron condor. These options have 30 days until they expire.įor the purpose of this example, we’re going to sell the $65 OTM calls for $2 and we’re also going to sell the $45 OTM puts for $2.Our idea is that the stock will stay in between these strikes and the options we sold will expire worthless. In the figure below you can see a hypothetical option chain of ABC stock. Let’s assume that ABC stock is trading at $55 per share. We’re going to show you by walking you through an iron condor example.
So, how does it work in practice? Let's show you how to take advantage of calls vs puts using this strategy. So, the iron condor can also be seen as a combination of two vertical spreads. To check if you constructed the iron condor options the right way you need to have two selling options and two buying options.īasically, iron condor options is a four-legged trade where you’re selling out of the money put spreads and simultaneously selling out of the money call spread! Note* each of the four options have the same expiration date but different exercise prices. Now, these four different options contracts as a group are called an iron condor. In order to construct an iron condor we’re also going to buy a further out of the money put and simultaneously buy a further out of the money call for protection. Like naked forex trading, short naked options have a lot of risk and can even require a lot of capital.
If this is the case we will keep the entire price we sold these options for. We do this with the hope that between now and the expiration, the stock price we will trade between the strikes and the options we sold will go to zero. The first element of an iron condor consists of selling an out of the money put and, at the same time, selling an out of the money call. You can start trading with it immediately and put time decay in your favor, even with a small account. Next, we’re going to teach you what an iron condor is and share one of our favorite iron condor strategies. Instead of fighting the time decay, we prefer to let it work for us and generate some profit out of it. When trading options, it's critical to have a grounded understanding of the time value. If you buy options, you’re constantly fighting this time decay, also known as theta decay. Time premium is sucked out of the market every day.
In options trading, the time element is very important. By the end of this trading tutorial, you’ll be an expert in trading iron condors for a living. Don’t let the name of the strategy intimidate you. The objective of the iron condor options is to allow traders to profit if the underlying instrument is not moving that much by expiration date. As a directionally neutral strategy, iron condor trading does not require you to forecast the market direction. With limited risk involved, you have the probability of winning a nice profit. The Iron Condor option trading strategy takes advantage of the low market volatility.