If there’s a sharp move in the price of the stock early on in the trade, you can make adjustments to your iron condor to recoup some of the losses. When it comes to managing your iron condor, it’s very important to pay attention to the stock price in relation to how far away it is from your strike prices. Knowing these 3 risk profile points of an iron condor will help you make sense of it as the price of the stock changes and will help you manage the trade appropriately. Remember that an iron condor has two break-even points. You lose $500 on the call side and keep all the initial premium as a result of writing iron condor for $280. In this example trade, your max loss is $220 ($500 – $280). The trader loses $500 on the call side and the puts expire worthless keeping all the premium. This price is above the upper call strike price of $245. The short call option is losing $10 ($250 – $240) while the long call option is making money $5 ($250- $245). Let’s assume the stock price is at $250 at expiration. The max loss occurs if the price of MSFT trades ABOVE $245 at expiration or below $210 at expiration. Our max profit is the total credit we collected as a result of writing the iron condor, $2.80. Knowing all this information let’s break down our max profit, max loss, and break-even points for the iron condor. Total premium collected on the call side = $1.15 ($4.50 – $3.35 ) Max Profit/Max Loss/Break Even ExplainedĪs a result of doing this iron condor, you received a total of $2.80 in credit( $1.65 + $1.15). Buy a CALL with $245 strike (-3.35 in premium).Sell a CALL with $240 strike (+4.50 in premium).Total premium collected on the put side = $1.65($5.50 – $3.85 ) Buy a PUT with $205 strike (-3.85 in premium).Sell a PUT with $210 strike (+$5.50 in premium).The max profit potential is limited to the credit amount received as a result of writing it minus brokerage commissions. Limited Profit PotentialĪlthough an IC is a great strategy to use to collect premium, it has limited profit potential. As such, it’s important to be aware of the different risk elements associated with iron condors. There are advantages and disadvantages to trading iron condors. Iron Condor Risk Profile (iron condor risk profile)īefore trading an iron condor, it’s important to be aware of all the risks involved. This is considered a broken wing iron condor that has an altered risk profile and usually ends up receiving more premium than a regular iron condor. If you end up altering the strike price on the put or call side, you can make it so that you have a slight directional bias with the iron condor while remaining neutral. As such, when you write an IC you will receive a net credit. The put and call options that are further out-of-the-money have lower premiums than the put and call options that are close to the stock price. Buy 1 OTM call ( further away from the price of the stock ).Sell 1 OTM call ( closer to the price of the stock). Buy 1 OTM put ( further away from the price of the stock).Sell 1 OTM put ( closer to the price of the stock ).You will receive a net credit as a result of creating the trade.īelow are the four separate contracts involved in creating an IC trade. For an IC to be profitable at expiration, the price of the stock needs to remain between the two wings. The wings of an iron condor protect against significant stock moves in either direction. The iron condor has limited downside risk as well as limited upside profit potential. Iron Condor Payoff Graph and Construction (iron condor payoff diagram) As such, iron condors are best used in a low volatility environment in which the price of the stock trades within a tight range. The goal of an iron condor is to have the underlying stock price “expire” in between the two strike prices. The two credit spreads are oftentimes referred to as the “wings” of the condor which have identical widths on each side that hold symmetrical risk. It’s made up of one credit spread on the put side and one credit spread on the call side with the same expiration date. The trade profits the most if the price of the underlying stays within a narrow price range What Is an Iron Condor?Īn iron condor (IC) is a combination of two vertical spreads on opposite ends of the market consisting of 4 separate options contracts.An iron condor consists of 4 different strike pricesall with the same expiration date.It has limited risk as well as limited profit potential.
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