• BREAKING NEWS: Dow Up Over 300 Points as Banks Begin Recovery
 
SIR Logo
  • About Us
    • Who We Are
    • About Bernie Schaeffer
    • Our Newsroom
    • FAQ
    • Contact Us
    • Corrections
    • Ethics & Fact Checks Policy
  • Market News
    • Sign Up for Free Market Newsletters
    • Opening View
    • Midday Market Check
    • Market Recap
    • View All Free Subscriptions
    • Schaeffer's Volatility Scorecard
    • Featured Publication
    • From the Top
    • Monday Morning Outlook
    • Indicator of the Week
    • Editor's Picks
    • View All
    • Trading Analysis
    • Best & Worst Stocks
    • Earnings Preview
    • Investor Sentiment
    • Quantitative Analysis
    • Technical Analysis
    • VIX & Volatility
    • View All
    • Stock Options
    • Intraday Options Activity
    • Most Active Options
    • Trade Postmortems
    • Options Recommendations
    • View All
    • Trading Education
    • Strategies & Concepts
    • Expectational Analysis
    • View All
    • Market News
    • Buzz Stocks
    • Stocks on the Move
    • Analyst Update
    • 5 Minute Market Rundown
    • Stock Market Podcasts
    • View All
    • Daily Market Newsletters
    • Opening View
    • Midday Market Check
    • Market Recap
    • View All
  • Premium
    • All Trading Services
    • Most Popular Services
    • Elite Trader
    • Quick-Hit Trader
    • Lightning Trader
    • Ultimate Trader
    • View All
    • Directional Trading
    • Options Under $5
    • Leverage
    • Weekly Options Trader
    • Event Trader
    • PowerTrend
    • Schaeffer's Players
    • Overnight Trader
    • View All
    • Advanced Trading Alerts
    • Wealthbuilder
    • Premium Trader
    • Hedge Hunter
    • Volatility Trader
    • Weekly Volatility Trader
    • View All
    • Weekend Alert
    • Weekend Player
    • Weekend Trader
    • Weekend Trader Alert
    • Expiration Week Countdown
    • Weekly Options Countdown
    • View All
    • Newsletter Trading Services
    • Master Portfolio
    • The Option Advisor
    • Schaeffer's Daily Bulletin
    • View All
    • Courses & Education
    • Getting Started with Options
    • View All
  • Options 101
  • Deals
    • Deal of the Week
    • Broker Center
    • Free Trial
  • Log-In
  • Search
>> PODCAST: tastylive's Jermal Chandler makes sense of the stock market<<

Iron Condor
Outlook: Expecting minimal price movement; bearish on volatility

The iron condor is a four-legged options strategy intended to capitalize on a period of muted, low-volatility price action in the underlying security. This play is essentially the combination of a short call spread with a short put spread, and -- like both of those strategies -- the maximum potential profit is limited to an initial net credit.

Alternately, the iron condor can be thought of as a hedged version of the short strangle. The two sold options at the inner strikes form the "body" of the condor, while two purchased options at the outer strikes represent the "wings." Due to those purchased options at the outer strikes, the iron condor has a considerably more conservative risk profile than the short strangle.

To understand how this many-legged spread works, let's break down an example.

Entering the Trade

Stock XYZ is relatively sedate, and the shares have spent the past couple of weeks consolidating in a narrow range between the $25 and $27 levels. You expect this sideways channel to hold firm during the near term, so you decide to implement an iron condor using these two price points as your focus strikes.

Simultaneously, you sell to open the 25-strike put, bid at 0.15, and buy to open a 24-strike put, asked at 0.06. For the other half of the condor, you simultaneously sell to open a 27-strike call, bid at 0.13, and buy to open the 28-strike call, asked at 0.03. You collected a total of 0.28 (0.15 + 0.13) on the sold options, and spent 0.09 (0.06 + 0.03) on the purchased options, for a net credit of 0.19 (0.28 - 0.09). Multiplying your upfront credit by 100 shares per contract, you've netted $19 upon entering the spread.

Potential Gains

As with the short call spread, short put spread, and short strangle, your maximum possible gain on an iron condor is limited to the initial net credit. You'll retain this entire amount if XYZ remains between the two sold strikes through expiration, in which case all four options can be left to expire worthless.

There are two breakeven rails on this trade: the sold call strike plus the net credit (27.19), and the sold put strike minus the net credit (24.81). However, if one of your sold options moves into the money prior to expiration, you may want to buy to close the contract to avoid assignment -- thereby incurring an additional transaction fee.

Potential Losses

Because each of your sold options is hedged by a purchased option at a nearby strike, your risk profile on an iron condor is clearly defined.

If XYZ should rally above the strike price of the purchased call, the most you can lose is limited to the difference between the bought and sold call strikes, less the net credit -- or [(28 - 27) - 0.19] = 0.81.

Similarly, if XYZ falls below the purchased put strike, the most you can lose is limited to the difference between the bought and sold put strikes, less the net credit -- again, [(25 - 24) - 0.19) = 0.81.

In both scenarios, this amount would be multiplied by 100 shares per contract, resulting in a maximum possible loss of $81.

Volatility Impact

The iron condor has two sold options at its core, and option sellers typically benefit from declining implied volatility. All other things being equal, lower implied volatility makes it cheaper to buy back the options, if needed. However, since an iron condor involves two bought and two sold options, the overall impact of implied volatility is somewhat muted.

Other Considerations

The success of an iron condor depends upon the stock staying in a relatively tight range throughout the lifespan of the trade. Make sure you're confident in the technical outlook for the security as you select your focus strikes. Additionally, it makes sense to focus on shorter-term options, which afford the shares less time to move against you.

In the same vein, be aware of any upcoming events -- such as a quarterly earnings report, for example -- that could trigger a big move in the stock. You may also want to avoid equities with high short interest-to-float ratios, since a short-squeeze rally can play havoc with an iron condor.

Additionally, be aware that the iron condor requires four opening transactions, which translates into much higher brokerage expenses than a two-legged credit spread. Weigh the potential reward carefully against your cost of entry to be sure you're not getting a raw deal.

    0

    0

    0

    Partnercenter


     

    About Schaeffer's
    Who We Are
    More about Bernie
    Business Hours
    Schaeffer's Sitemap
    How Can We Help?
    Access Your Account
    Contact Us
    Privacy Policy
    Legal Notices
    Premium Products
    Trading Services
    Educational Programs
    Deal of the Week
    Free Market Newsletters
    Let's get social:
    Twitter logo Facebook logo Instagram logo YouTube logo Linkedin logo
    © 2021 Schaeffer's Investment Research, Inc.
    5151 Pfeiffer Road, Suite 450, Cincinnati, OH 45242
    All Rights Reserved. Unauthorized reproduction of any SIR publication is strictly prohibited.