Iron Condor | Everything You Need to Know

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The reverse iron condor spread is an options trading strategy designed to be used when you are expecting an underlying security to make a sharp move in price, but you aren't sure in which direction that move will be. It's an advanced strategy that involves calls and puts, and it requires a total of four transactions. At the time of applying this strategy, you'll know exactly how much you stand to make or lose, because the potential profits and the potential losses are both limited.

For more information on this strategy please see below. As a volatile trading strategy, the reverse iron condor spread is used when you are expecting some volatility in the price of the underlying security. It profits when there's a significant price movement, but it doesn't matter in which direction that price movement is. This is one of the more complicated strategies and, it isn't particularly recommended for traders that are inexperienced.

There are four legs involved in this strategy. To keep things simple you can transact all four of the required legs at the same time, but you can choose to use legging techniques if you are comfortable doing so. This can help to maximize the potential profitability. The number of contracts bought or written in each of the four legs should be the same.

The expiration date of all contracts should also iron condor definition option trading strategy the same. Iron condor definition option trading strategy two long legs where you buy contracts should both use strikes that are the same iron condor definition option trading strategy out of the money.

The wider the difference between the strikes of these two legs, the lower the maximum potential loss is. The two iron condor definition option trading strategy legs where you sell contracts should both be further out of the money than the long legs, by the same distance. The wider the difference between the strikes of these two legs, the less likely the strategy is to return a profit. However, a wider difference also means greater iron condor definition option trading strategy profit.

To give you some idea of how the reverse iron condor spread can be used we have provided an example below. For the sake of simplicity we have used hypothetical options prices and ignored commission costs.

For this strategy to return a profit the price of the underlying security must move below the strike of the options in Leg A or above the strike of the options in Leg C. It will result in a loss if the price doesn't move far enough in either direction, or if it stays the same.

You can calculate the exact break even points of this strategy at the time of applying it. You can also calculate the maximum potential profit and the maximum potential loss. We have listed the calculations you need to make below, iron condor definition option trading strategy with the results of some hypothetical scenarios.

If you are expecting a security to move significantly but are not sure in which direction it will move, this is a good strategy for a couple of reasons. The maximum profit and the maximum iron condor definition option trading strategy are both predictable, and you are able to adjust the strikes to determine how much you wish to make and how much you need the price of the security to move by.

The main downside is that it's a complicated strategy to use. The fact that there are four legs involved also means that you will pay a fair amount in commission charges. Reverse Iron Condor Spread The reverse iron condor spread is an options trading strategy designed to be used when you are expecting an underlying security to make a sharp move in price, but you aren't sure in which direction that move will be. Section Contents Quick Links. When to Use the Reverse Iron Condor Spread As a volatile trading strategy, the reverse iron condor spread is used when you are expecting some volatility in the price of the underlying security.

The four orders required at the outset are as follows. Buy out the money puts Sell out of the money puts lower strike than above Buy out of the money calls Sell out of the money calls higher strike than above The number of contracts bought or written in each of the four legs should be the same.

This is Leg A. This is Leg B. This is Leg C. This is Leg D. The puts sold in Leg B will also be worthless. The calls in Legs C and D would all be worthless. Read Review Visit Broker.

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The iron condor is an option trading strategy utilizing two vertical spreads — a put spread and a call spread with the same expiration and four different strikes. A long iron condor is essentially selling both sides of the underlying instrument by simultaneously shorting the same number of calls and puts, then covering each position with the purchase of further out of the money call s and put s respectively.

The converse produces a short iron condor. In keeping with this analogy, traders often refer to the inner options collectively as the "body" and the outer options as the "wings".

The word iron in the name of this position indicates that, like an iron butterfly , this position is constructed using both calls and puts, by combining a bull put spread with a bear call spread.

The combination of these two credit spreads makes the long iron condor and the long iron butterfly a credit spread, despite the fact that it is "long. Because the long, plain Condor and Butterfly combine a debit spread with a credit spread, that overall position is instead entered at a net debit though usually small. One of the practical advantages of an iron condor over a single vertical spread a put spread or call spread , is that the initial and maintenance margin requirements [2] for the iron condor are often the same as the margin requirements for a single vertical spread, yet the iron condor offers the profit potential of two net credit premiums instead of only one.

This can significantly improve the potential rate of return on capital risked when the trader doesn't expect the underlying instrument's spot price to change significantly. Another practical advantage of the iron condor is that if the spot price of the underlying is between the inner strikes towards the end of the option contract, the trader can avoid additional transaction charges by simply letting some or all of the options contracts expire.

The difference between the put contract strikes will generally be the same as the distance between the call contract strikes. Because the premium earned on the sales of the written contracts is greater than the premium paid on the purchased contracts, a long iron condor is typically a net credit transaction. This net credit represents the maximum profit potential for an iron condor. The potential loss of a long iron condor is the difference between the strikes on either the call spread or the put spread whichever is greater if it is not balanced multiplied by the contract size typically or shares of the underlying instrument , less the net credit received.

A trader who buys an iron condor speculates that the spot price of the underlying instrument will be between the short strikes when the options expire where the position is the most profitable. Thus, the iron condor is an options strategy considered when the trader has a neutral outlook for the market. The long iron condor is an effective strategy for capturing any perceived excessive volatility risk premium , [3] which is the difference between the realized volatility of the underlying and the volatility implied by options prices.

Buying iron condors are popular with traders who seek regular income from their trading capital. An iron condor buyer will attempt to construct the trade so that the short strikes are close enough that the position will earn a desirable net credit, but wide enough apart so that it is likely that the spot price of the underlying will remain between the short strikes for the duration of the options contract. The trader would typically play iron condors every month if possible thus generating monthly income with the strategy.

An option trader who considers a long iron condor is one who expects the price of the underlying instrument to change very little for a significant duration of time. This trader might also consider one or more of the following strategies.

To sell or "go short" an iron condor, the trader will buy long options contracts for the inner strikes using an out-of-the-money put and out-of-the-money call options. The trader will then also sell or write short the options contracts for the outer strikes. Because the premium earned on the sales of the written contracts is less than the premium paid for the purchased contracts, a short iron condor is typically a net debit transaction.

This debit represents the maximum potential loss for the short iron condor. The potential profit for a short iron condor is the difference between the strikes on either the call spread or the put spread whichever is greater if it is not balanced multiplied by the size of each contract typically or shares of the underlying instrument less the net debit paid. A trader who sells a short iron condor speculates that the spot price of the underlying instrument will not be between the short strikes when the options expire.

If the spot price of the underlying is less than the outer put strike, or greater than the outer call strike at expiration, then the short iron condor trader will realise the maximum profit potential. An option trader who considers a short iron condor strategy is one who expects the price of the underlying to change greatly, but isn't certain of the direction of the change. From Wikipedia, the free encyclopedia.

The Bible of Options Strategies. Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative. Retrieved from " https: Options finance Derivatives finance. Views Read Edit View history. This page was last edited on 17 June , at By using this site, you agree to the Terms of Use and Privacy Policy.