Investors use Iron Condors when they are neutral an underlying stock and expect range bound trading between now and a future expiration date. By selling OTM put and call options and buying further OTM put and call options, the Iron Condor profits if the underlying stock trades within the selected range. This strategy may sound familiar. That's because an Iron condor is simply a combination of a Bull Put Spread and a Bear Call Spread.The ultimate goal of the investor is for all the options to expire worthless and to keep the credit received.
An Iron Condor is Delta neutral, however it can be skewed with a Delta bias as well. Also, the position is Theta positive because the passage of time helps the position. However, the position is Vega negative because rises in the underlying stock's implied volatility create more uncertainty that the stock will trade range bound.
Components:
1) Write OTM call option and buy further OTM call option
2) Write OTM put option and buy further OTM put option.
Margin Requirement = Difference In Strikes - Credit Received
Breakeven on Downside = Written Put Strike - Credit Received
Breakeven on Upside = Written Strike + Credit Received
Maximum Loss = Difference In Strikes - Credit Received
Maximum Profit = Credit Received
An investor is neutral on XYZ stock which is trading at $35 per share. To open an iron condor:
Write December 40 call option for a credit of $3.00
Buy December 45 call option for a debit of $2.00
Credit Received: $1.00
Write December 30 put option for a credit of $3.00
Buy December 25 put option for a debit of $2.00
Credit Received: $1.00
Margin Required: $4.00
Breakeven on Downside: $24.00
Breakeven on Upside: $41.00
Max. Loss: $4.00
Max. Profit: $2.00
Iron Condor Risk Profile
Iron Condor Greeks:
Delta:
Neutral
Gamma: Neutral
Theta: Positive
Vega: Negative
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