The iron condor credit spread strategy is employed by stock market traders when they think that an investment is going to trade sideways for a quantity 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 here is the case, equity option trades can make the most of what is called 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 merely the combination 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 since the sold options bring in 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 become profitable. However, sharp moves by the underlying stock to the upside or downside will cause the career to become a loss. The further out from the money the purchased choices are, the more the chance versus reward setup will increase. Simply, the more risk you take on for the trade, the more credit you can potentially receive at expiration.trading options
We will now setup a typical example of an iron condor trade and how exactly to implement one. Let's claim that Apple (AAPL) is trading at $620 per tell 41 days to go until expiration. We believe that it is highly probable that the stock is likely to be trading between $580 and $640 at expiration. If we start with the bull put spread, we'd want to buy the 580 put strike option for $4.40 and sell the 590 put strike option for $6.00. Thus giving us a net credit of $1.60. Next, we'd complete the iron condor position by establishing a bear call spread. To do this, we'd buy the 660 call strike option for $4.25 and sell the 650 call strike option for $6.20. This might give us a net credit of $1.95.
To calculate our overall risk and reward, we'd simply accumulate our total credits from each spread, which gives us $3.55. To calculate our risk for the trade, we'd subtract the credit received from the total difference in strike prices. Within our example would subtract $3.55 from $10.00, which gives us a total of $6.45 of risk. Therefore, we can calculate that this 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've the ability to profit $355 at expiration while risking $645. Therefore, if Apple stock is trading between $590 and $650 per share at expiration this trade is likely to be fully profitable.
The condor strategies are great to utilize in markets that are not experiencing plenty of volatility and neither the bulls nor the bears have a dominant stranglehold on the market. It's highly suggested never to execute an iron condor on an investment when earnings will occur within the period of time 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 company you are considering opening this trade on. Also, make sure to identify clear quantities of support and resistance, as these could help identify high probability areas with which to set up your iron condor. Identifying the right times to open this type of trade allows a trade to profit when an investment is trending sideways. Because this really is so the case with markets, being able to properly execute the iron condor strategy is imperative to being a successful options trader.