Iron condor

Article contents



At a glance



Setting up the strategy


  1. Buy one out-of-the-money put

  2. Sell one out-of-the-money put with a higher strike price

  3. Sell one out-of-the-money call

  4. Buy one out-of-the-money call with a higher strike price
All options must have the same expiration. At expiration, you want the stock price to close between the short put strike and short call strike.

Who should run this?


Advanced traders only.

Margin requirements


Learn more about Questrade’s option margin requirements.

Strategy overview



An iron condor is an options strategy in which a trader simultaneously does the following:


  • Buys one out-of-the-money put
  • Sells one out-of-the-money put with a higher strike price
  • Sells one out-of-the-money call
  • Buys one out-of-the-money call with a higher strike price
The call strikes must be above the current stock price; conversely, the put strikes must be below the current strike price. The difference between the call strikes must equal the difference between the put strikes, and all options must have the same expiry date.


An iron condor strategy can be used if you believe the stock will have low volatility up to the option expiry date.

Market outlook


  • Neutral

Strategy benefits


  • Can still profit if the stock remains stagnant or within a tight trading range at expiration.
  • Credit spread helps reduce the overall risk. 
  • Maximum loss and maximum profit can be accurately estimated.

Strategy downsides


  • Can lose if the stock moves beyond the spread in either direction.
  • Credit received may not cover the maximum risk.

Iron condor example



Scenario


ABC shares are currently trading at $154 in March 2013, and you believe the stock will remain within a tight trading range over the next 30 days. To set up an iron condor strategy, you do the following:


  • Buy one $144 April put for $61 ($0.61 premium x 100 shares)
  • Sell one $149 April put for $124 ($1.24 premium x 100 shares)
  • Sell one $159 April call for $37($0.37 premium x 100 shares)
  • Buy one $164 April call for $8 ($0.08 premium x 100 shares)
After initiating the trade, you will be credited $95.


Possible results


  1. The stock closes at $156 at expiration, meaning all options would expire worthless. As a result, you would keep the entire $95 credit as profit.

  2. At expiration, the stock drops significantly to $140, meaning the 144 long put and 149 short put both expire in the money. In this case, you would suffer a $500 loss. After applying the $95 credit you initially received, your total losses would be $405.

  3. Upon expiration in April, the stock moves up 14 points and closes at $168, meaning the put options expire worthless. However, the 159 short call and 164 long call expire in the money. You would suffer a $500 loss. After applying the $95 credit you initially received, your total losses would be $405.

Profit and loss explained



Maximum profit


Maximum profit = option premium received

Maximum loss

Maximum loss = long call strike price – short call strike price – option premium received

Break-even at expiration


There are two break-even points at expiration:

  • Break-even point #1= short call strike price + option premium received
  • Break-even point #2 = short put strike price – option premium received

Sample calculations



  • Stock value at start of strategy: $154
  • To execute the strategy: Buy $144 put option for $61, Sell $149 put option for $124, Sell $159 call option for $37, Buy $164 call option for $8
  • Result: $95 net credit
Stock price at expiration Profit and loss calculations 
$140 The 144 long put and 149 short put both expire in the money. The trade transaction would look like this:


$144 (long put strike price)
x 100 (number of shares)

$149 (short put strike price)
x 100 (number of shares)
+ $95 (net credit to initiate the strategy)  
= $405 loss 
$156 All options expire worthless, and your total profit would be the initial credit you received to enter the trade.


$1.24 (option premium received per share for selling the short put)
x 100 (number of shares per option contract)
+ $0.37 (option premium received per share for selling the short call)
x 100 (number of shares per option contract)
–$0.61 (option premium paid per share for buying the long put)
x 100 (number of shares per option contract)
– $0.05 (option premium paid per share for buying the long call)
x 100 (number of shares per option contract)
= $95 profit

$168 Only the call options would finish in the money. The trade transaction would look like this at expiry:


$159 (short call strike price)
x 100 (number of shares per option contract)

$164 (long call strike price)
x 100 (number of shares per option contract)
+ $95 (net credit to initiate the strategy)
= $405 loss



Note
: commission fees are not included in the above calculations.


Payoff diagram






Creating an iron condor






Standard order details

Order detail

Description

Symbol lookup field

Click  and change the mode to , then enter the symbol you want to buy or sell.

Tip: if you don't know the symbol name, try entering the company name.

The default expiration date, strike price, and strategy appear. 



Modify the expiration date, strike price, and option strategy accordingly. For more information, see Elements of an option quote.

Action The buy or sell action is set for you when you select the strategy type.
Qty

Select a value using the arrows , or enter a value manually.

Note: by default, the quantity will be populated with the value set in your user preferences.
Order type Select the type of order you want to submit. When creating strategy orders, only Limit or Market order types are available. For more information, see Order types.

The limit order type requires you to fill in additional fields. Refer to the table section below for details.
Duration

Select a duration to specify how long the order should remain active. For more information, see Order durations.

Route Select a route or leave the selection at Auto to let the platform determine the best one. Canadian routes will be listed for Canadian symbols and U.S. routes will be listed for U.S symbols.
Sub-route

This field will be filtered according to the route selection. It indicates where you prefer the order to be executed. Leave the selection at Auto to let the platform determine the best route.

Note: sub-route selection is only available for Canadian symbols.
Account

Specify the account you want to use to submit an order. This field will display the account you have set as your default under user preferences, or the account you have selected in any of the linked windows. See Linking and unlinking windows for details.

Order type-specific details
Limit Enter your limit price:

  • To have the price fluctuate according to real-time data, click the lock   and select either Follow ask price  or Follow bid price .
  • To choose a custom price, select Do not follow .
Note: if real-time market data is not available, the limit price will be blank and the float limit icon will be unlocked.




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