Long iron condor option strategy
The iron condor is an option trading strategy utilizing two vertical spreads — a put spread and a call spread with the same expiration and four different strikes. A long iron condor is essentially selling both sides of the underlying instrument by simultaneously shorting the same number of long iron condor option strategy and puts, then covering each position with the purchase of further out of the money call s and put s respectively.
The converse long iron condor option strategy a short iron condor. In keeping with this analogy, traders often refer to the inner options collectively as the "body" and the outer options as the "wings". The word iron in the name of this position indicates that, like an iron butterflythis position is constructed using both calls long iron condor option strategy puts, by combining a bull put spread with a bear call spread. The combination of these two credit spreads makes the long iron condor and the long iron butterfly a credit spread, despite the fact that it is "long.
Because the long, plain Condor and Butterfly combine a debit spread with a credit spread, that overall position is instead entered at a net debit though usually small.
One of the practical advantages of an iron condor over a single vertical spread a put spread or call spreadis that the initial and maintenance margin requirements  for the iron condor are often the same as the margin requirements for a single vertical spread, yet the iron condor offers the profit potential of two net credit premiums instead of only one. This can significantly improve the potential rate of return on capital risked when the trader doesn't expect the underlying instrument's spot price to change significantly.
Another practical advantage of the iron condor is that if the spot price of the underlying is between the inner strikes towards the end of the option contract, the trader can avoid additional transaction charges by simply letting some or all of the options contracts expire.
The difference between the put contract strikes will generally be the same as the distance between the call contract strikes. Because the premium earned on the sales of the written contracts is greater than the premium paid on the purchased contracts, a long iron condor is typically a net credit transaction.
This net credit represents the maximum profit potential for an iron condor. The potential loss of a long iron condor is the difference between the strikes on either the call spread or the put spread whichever long iron condor option strategy greater if it is not balanced multiplied by the contract size typically or shares of the long iron condor option strategy instrumentless the net credit received. A trader who buys an iron condor speculates that the spot price of the underlying instrument will be between the short strikes when the options expire long iron condor option strategy the position is the most profitable.
Thus, the iron condor is an options strategy considered when the trader has a neutral outlook for the market. The long iron condor is an effective strategy long iron condor option strategy capturing any perceived excessive volatility risk premium which is the difference between the realized volatility of the underlying and the volatility implied by options prices.
Buying iron condors are popular with traders who seek regular income from their trading capital. An iron condor buyer will attempt to construct the trade so that the short strikes are close enough that the position will earn a desirable net credit, but wide enough apart long iron condor option strategy that it is likely that the spot price of the underlying will remain between the short strikes for the duration of the options contract.
The trader would typically play iron condors every month if possible thus generating monthly income with the strategy. An option trader who considers a long iron condor is one who expects the price of the underlying instrument to change very little for a significant duration of time. This trader might also consider one or more of the following strategies. To sell or "go short" an iron condor, the trader will long iron condor option strategy long options contracts for the inner strikes using an out-of-the-money put and out-of-the-money call options.
The trader will then also sell or write short the options contracts for the outer strikes. Because the premium earned on the sales of the written contracts is less than the premium paid for the purchased contracts, a short iron condor is typically a net debit transaction. This debit represents the maximum long iron condor option strategy loss for the short iron condor.
The potential profit for a short iron condor is the difference between the strikes on either the call spread or the put spread whichever is greater if it is not balanced multiplied by the size of each contract typically or shares of the underlying instrument less the net debit paid.
A trader who sells a short iron condor speculates that the spot price of the underlying instrument will not be between the short strikes when the options expire. If the spot price of the underlying is less than the outer put strike, or greater than the outer call strike at expiration, then the short iron condor trader will realise the maximum profit potential.
An option trader who considers a short iron condor strategy is one who expects the price of the underlying to change greatly, long iron condor option strategy isn't certain of the direction of the change. From Wikipedia, the free encyclopedia. The Bible of Options Strategies. Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative. Retrieved from " https: Options finance Derivatives finance.