The iron condor credit spread strategy is used by stock market traders if they feel that an inventory is going to trade sideways for a specific amount of time. Perhaps they expect small fluctuations up and down in the underlying stock price, however over the following 30 days price action will remain relatively unchanged. When this is the case, equity option trades can make the most of what is recognized as time decay, or positive theta. What theta represents may be the decay in the worthiness of an out-of-the-money option as its expiration date approaches. The iron condor setup is simply the mixture of a bull put spread and a bear call spread.trading options
This trade is set up by selling out-of-the-money options and purchasing further out-of-the-money-options. Once structured, the trade will get a net credit because the sold options generate a higher premium than the cost of the purchased options. As time decay continues to wear at the worthiness of most options, the trade could possibly become profitable. However, sharp moves by the underlying stock to the upside or downside can cause the positioning to become loss. The further out of the money the purchased options are, the more the risk versus reward setup will increase. Simply, the more risk you accept for the trade, the more credit you are able to potentially receive at expiration.options strategies
We will now setup a typical example of a metal condor trade and how exactly to implement one. Let's suggest that Apple (AAPL) is trading at $620 per share with 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 start with the bull put spread, we would want to purchase the 580 put strike choice for $4.40 and sell the 590 put strike choice for $6.00. This provides us a net credit of $1.60. Next, we would complete the iron condor position by setting up a bear call spread. To achieve this, we would buy the 660 call strike choice for $4.25 and sell the 650 call strike choice for $6.20. This would give us a net credit of $1.95.
To calculate our overall risk and reward, we would simply add up our total credits from each spread, which provides us $3.55. To calculate our risk for the trade, we would subtract the credit received from the total difference in strike prices. In our example would subtract $3.55 from $10.00, which provides us an overall total of $6.45 of risk. Therefore, we could calculate that trade provides the potential to create $3.55 for every $6.45 we risk. Since one option contract represents 100 shares of the underlying stock, we've 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 work with in markets which are not experiencing lots of volatility and neither the bulls nor the bears have a dominant stranglehold on the market. It is highly suggested never to execute a metal condor on an inventory when earnings will occur within the timeframe of the trade being open. Earnings are one of many single biggest drivers of stock price movements. Always make sure to check for upcoming earnings on the business you are considering opening this trade on. Also, make sure to identify clear levels of support and resistance, as these may help identify high probability areas with which to setup your iron condor. Identifying the correct times to open this sort of trade allows a trade to profit when an inventory is trending sideways. Because this really is so often the case with markets, being able to properly execute the iron condor strategy is vital to being a successful options trader.