Iron Condor
An Iron Condor is an Options trading strategy that involves simultaNeously selling an out-of-the-Money call and put option, while also buying a further out-of-the-Money call and put option. This strategy is designed to profit from low volatility in the underlying Asset, as it allows the trader to collect premiums from the sold Options while limiting potential losses through the purchased Options.
The Iron Condor is typically structured as follows:
- Sell 1 out-of-the-Money call option
- Buy 1 further out-of-the-Money call option
- Sell 1 out-of-the-Money put option
- Buy 1 further out-of-the-Money put option
Example:
- Underlying Stock is trading at $50.
- Sell 1 call option with a Strike Price of $55.
- Buy 1 call option with a Strike Price of $60.
- Sell 1 put option with a Strike Price of $45.
- Buy 1 put option with a Strike Price of $40.
In this scenario, the trader profits if the Stock price remains between $45 and $55 at expiration, as all Options would expire worthless and the trader keeps the premium collected. If the Stock price moves significantly outside this range, the losses are capped due to the purchased Options.
Cases:
- If the Stock closes at $52, all Options expire worthless and the trader keeps the premium.
- If the Stock closes at $44, the trader incurs a loss on the put Options, but it is limited to the difference between the sold and bought put Strike Prices, minus the net premium received.
- If the Stock closes at $58, the loss is limited similarly on the call side.