Iron Condor
An Iron Condor is an options trading strategy that benefits from a stable or neutral market. This strategy involves selling an out-of-the-money (OTM) call and put, while simultaneously buying further OTM call and put options. The Iron Condor aims to profit from the low volatility of the underlying asset by capturing the premium from the sold options while limiting potential losses.
Another way to look at an Iron Condor is as a combination of a put credit spread and a call credit spread.
Example of Iron Condor:
Let's consider an Iron Condor on the S&P 500 Index (SPX), which is currently (July 25, 2024) trading at 5440. We will sell an Iron Condor with 45 days to expiration.
- Sell a 5540 SPX Call and Buy a 5560 SPX Call: This creates a bear call spread.
- Sell a 5340 SPX Put and Buy a 5320 SPX Put: This creates a bull put spread.
The premium received from selling the 5540 call and the 5340 put offsets the cost of buying the 5560 call and the 5320 put. The maximum profit is realized if SPX remains between 5540 and 5340 at expiration, allowing all options to expire worthless. The maximum loss is limited to the difference between the strike prices of the spreads minus the net premium received.
In our example, we collect 13.8 dollars for the Iron Condor. The following graph illustrates the potential profit and loss when the Iron Condor expires in 45 days.
The max profit is the premium we have received - 13.8 dollars. We multiply this with 100, the standards contract size in options. Therefore the max profit with one contract is 1380 dollars.
The max loss is the width of the spread minus the premium received. In our example the width of the spread is 20 dollars. The max loss is therefore 20 minus 13.8 dollars = 6.2 dollars. Or 620 dollars for one contract.
When to use Iron Condor
This strategy is best used when you expect the SPX to trade within a specific range and do not anticipate significant price movements. If nothing else changes, the Iron Condor benefits from the decay of theta - or time.