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26 Mar 2016
The iron condor credit spread strategy is employed by stock market traders when they think that an inventory will probably trade sideways for a certain amount of time. Perhaps they expect small fluctuations up and down in the underlying stock price, however over the next 30 days price action will remain relatively unchanged. When this is actually the case, equity option trades can make the most of what is recognized as time decay, or positive theta. What theta represents is the decay in the value of an out-of-the-money option as its expiration date approaches. The iron condor setup is merely the mixture of a bull put spread and a bear call spread.options trading

This trade is established by selling out-of-the-money options and purchasing further out-of-the-money-options. Once structured, the trade will get a net credit as the sold options make an increased 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 positioning becoming a loss. The further out from the money the purchased choices are, the more the danger versus reward setup will increase. Simply, the more risk you accept for the trade, the more credit you are able to potentially receive at options

We shall now create an example of an iron condor trade and just how to implement one. Let's suggest that Apple (AAPL) is trading at $620 per tell 41 days to go until expiration. We still find it highly probable that the stock will undoubtedly be trading between $580 and $640 at expiration. If we focus on the bull put spread, we would want to get the 580 put strike selection for $4.40 and sell the 590 put strike selection 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 do this, we would choose the 660 call strike selection for $4.25 and sell the 650 call strike selection for $6.20. This will give us a net credit of $1.95.

To calculate our overall risk and reward, we would simply accumulate our total credits from each spread, gives us $3.55. To calculate our risk for the trade, we would subtract the credit received from the sum total difference in strike prices. Within our example would subtract $3.55 from $10.00, gives us a total of $6.45 of risk. Therefore, we can calculate that trade provides the potential to produce $3.55 for every single $6.45 we risk. Since one option contract represents 100 shares of the underlying stock, we have the capability 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.

The condor strategies are great to make use of in markets that aren't experiencing a lot of volatility and neither the bulls nor the bears have a dominant stranglehold on the market. It is highly suggested to never execute an iron condor on an inventory when earnings will occur within the time period of the trade being open. Earnings are one of the single biggest drivers of stock price movements. Always make sure you check for upcoming earnings on the company you're considering opening this trade on. Also, make sure you identify clear quantities of support and resistance, as these could help identify high probability areas with which to create your iron condor. Identifying the right times to open this kind of trade allows a trade to profit when an inventory is trending sideways. Because that is so often the case with markets, being able to properly execute the iron condor strategy is vital to being fully a successful options trader.


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