The Iron condor choice strategy is surely
one of the most useful and safest of all option trading strategies.
Unlike the strangle or the straddle, the iron condor strategy only has 1 way to perform, and it is a selling biased pick strategy.
In this guide, we are going to take a look at what is an fe condor choice, we will perform an example of how to use it, and we will learn the iron condor risks and how to manage it.
What is the Iron Condor selection strategy?
The Iron Condor options strategy
is a combination of the two existing credit spreads strategies.
At its core,
the Fe Condor option is a neutral biased technique
that will allow us to accept profits from the lack of motility over a certain asset.
When to use Atomic number 26 Condor pick strategy?
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We should be using an
Iron Condor whenever we believe the market is going to stay flat
over a menstruum of time.
It is a step forward to the strangle and the straddle strategies because the Iron Condor risks are much lower compared to those ii strategies, as we will acquire later.
How Iron Condor works?
To truly understand how an Atomic number 26 Condor works, nosotros should focus on how does a credit spread work.
For example, when we open up a carry call credit spread, we are receiving some money because
we are saying that the stock toll is non going to rise above the selling leg of the spread.
In these cases, if the marketplace price stays nether the shorted strike price of our spread,
nosotros volition keep the premium and brand a turn a profit. However, if we decided to open, at the same fourth dimension, a bull put credit spread, we would be making
another turn a profit if the underlying does not fall below the selling leg of that spread.
We have created a neutral zone
in which we will keep the profit from both credit spreads if the underlying ends up between the strike prices of the selling legs of those spreads.
Why utilise Atomic number 26 Condor selection strategy?
We may have two reasons to exercise so:
- We believe the the underlying is going to stay flat or betwixt certain thresholds for some time. In these cases, nosotros will open up an Fe Condor option such as nosotros would open a short strangle or a short straddle, to turn a profit from this scenario. With the Iron Condor pick strategy, we are reducing the risk because we are covering ourselves with the legs of the bought strikes of the credit spreads.
- For those cases in which we may have a credit spread opened and the underlying is moving against our merchandise. In these cases, opening another credit spread in the opposite direction to create
the Iron Condor option strategy will reduce our losses while maintaining the same levels of risks.
Atomic number 26 Condor management, we may be able to reduce the risk of other strategies too if things do non perform as nosotros expected.
Let the states have a expect at an Iron Condor example to understand how does information technology piece of work amend
Iron Condor option strategy example
Let the states suppose we want to merchandise an Iron Condor choice strategy over the company Costco Wholesales because nosotros believe the stock price is going to stay quite flat for the following two weeks.
The first thing nosotros accept to do is
to determine the limits in which we believe the stock cost is going to stay
because those two thresholds are going to be the curt legs of our spreads.
To do and so, we tin use different technical indicators such as the Keltner Channels or the Bollinger Bands, which may be very useful in this situation.
The stock price is at $372 today, and we believe the stock toll is going to stay betwixt $380 and $360. In this instance, these two are going to be the prices of our selling strikes. Permit u.s.a. take a look at the calculator to identify how much premiums are we going to obtain if we decide to open these trades when the volatility is about 36%.
As you can see in our reckoner in the image above, if nosotros decide to open an Iron Condor, information technology is the equivalent to open up two credit spreads.
- The start 1, the bull put credit spread, is formed past the sold $360 strike price and the bought $350 strike price, in a net income of $ii.71.
- The second one, the bear call credit spread, is formed past the sold $380 strike cost and the bought $390 strike price, with a net income of $3.10.
In other words,
for every Iron Condor pick strategy we decide to open, nosotros will receive a total income of $five.81.
In every example, we are taking fifteen days to expiration. Now, the easiest thing to empathize how our Iron Condor direction is to show the graph with the strike prices of the strategy. Let united states set up all the important points in the nautical chart provided by ProRealTime charting software.
Breaking down the Iron Condor option strategy
In the graph, we can see many different parameters, so we will define every i of them.
At the lesser of the chart, we can run across two orange lines that stand for the strike prices of the bull put credit spread.
In the upper part of the nautical chart, the strike prices of the bearish call credit spread are marked in green.
Every fourth dimension nosotros open an Fe Condor option strategy,
we receive a credit for it. To decide where is the threshold in which we volition begin to lose coin, we must subtract the premium received to the selling leg of both spreads. The red dotted line represents the threshold at which we will brainstorm to lose money.
To make things easier to comprehend, the red areas of the chart determines the Iron Condor risks, while the dark-green expanse is the zone in which we will keep profits.
However, unlike the straddle or the strangle,
the Iron Condor selection strategy risk is completely limited by the differences between the strikes of our spreads.
The difference in strike prices in the put credit spread is $10, so our limit to the downside is $10 minus the premium received ($five.81). And it will happen exactly the aforementioned to the other side.
Fe Condor pick strategy payoff diagram
To completely empathise our trade, we must place the performance with our Fe Condor profit calculator. To exercise so, we will have our selection strategy calculator to assistance united states in this task.
As you lot can meet, the Atomic number 26 Condor choice strategy shows u.s. the area in which we will obtain a profit and in the zones in which we will make a loss.
The most exciting thing to remark nearly this breakdown is that the turn a profit is higher than the maximum possible loss, making the Atomic number 26 Condor pick strategy a very powerful tool to utilize in the options market.
Fe Condor option strategy margin requirement
As nosotros are dealing with a biased selling strategy,
the broker will enquire us to have a margin in our account to allow united states to open this trade, so we volition need to have a margin account to be able to practise and so. Let the states breakup how to identify the margin requirement of the Iron Condor.
When we open up a credit spread, the broker will ask usa for a margin to deport on. This margin is calculated past subtracting the strike price of the bought leg minus the strike cost of the selling branch and multiplied by one hundred.
Following our example, the bull put credit spread nosotros opened in Costco Wholesales equally part of the Iron Condor pick strategy had a strike price at $360 and $350. In this instance, the difference between strikes is $x, which would cost the states a total margin of $1000 to open up the merchandise.
Simultaneously, the behave call credit spread had another deviation of $10 between strikes, so the margin would exist once again $grand.
Still, to open our Iron Condor,
the broker is only going to us enquire us the margin of the spread whose strike price departure is higher. In our case, both spreads accept the same distance in cost, then to open our Atomic number 26 Condor, nosotros volition only need $one thousand.
The reason is nosotros cannot lose any more than money than the $1000 in either management.
What happens when an Iron Condor pick strategy expires In The Money?
When the underlying price of the asset ends up expiring between the strikes prices of our credit spreads, the most probable thing to happen is that
nosotros volition be assigned to the shorted leg of the spread.
In these cases, to eliminate the risks associated, we would have to exercise our bought strike to compensate for the debt.
We would brand a loss depending on the underlying price and the premium we received for opening the Iron Condor option strategy.
something we tin can just determine past calculating the risks and profits beforehand.
Can you close an Fe Condor early?
We could close our Iron Condor choice strategy whenever we desire. Still, we should take into account that, as we are dealing with a biased selling strategy, we are going to make the best profits when we go out information technology some time to time decay bear on the options.
If we take a look at the Iron Condor payoff diagram, we will encounter a better profit when the time to the expiration arrives
Last words about the Iron Condor option strategy
Of all of the option strategies,
the Iron Condor risk is lower compared to the profits.
As the ratio of run a risk/reward is the higher, the Atomic number 26 Condor is a nifty strategy we could use when nosotros demand to reduce risks in a credit spread or when we are sure the market is not going to motion.
The power of the Iron Condor option strategy comes from the lack of movement in the market, so we should keep that in heed to make the best of it.
Also, we must be certain that we
are opening these strategies with a loftier volume and open interest.
If you still do not understand very well what is the deviation between these two concepts, nosotros recommend you to take a look at this article, in which nosotros explain the diferences between volume and open up interest in options.
Atomic number 26 Condor option strategy profit calculator
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