Option Trades: the vertical spread called iron condor.

in options-trading •  9 months ago 


The iron condor is a options trade made up of two spreads which are very far out from the market price and the option diagram conjures is images of a bird with very wide wings, hence the name. But I like to call the double dipper. When I say double dipper I mean that I’m getting two maximum gains for the price of one potential loss.

As you may know, when we sell a credit spread we sell the close to the market position and by a farther from the market position and our maximum profit is the net credit. The maximum loss is the difference between those two positions in dollars or cents times a dollar.

I sell a call spread on Apple.
Apple current price 200$.
I sell the 230 call for five dollars.
I buy the 235 for 3.5 dollars.
Both are multiplied by 100 shares per contract.
I buy the 235 price for $3.5times 100 = $350
I sell the 230 price for $5.00 = $500.
My net credit is 5.00 - 3.5 or 1.5 times 100 = $150, this my max profit or net credit.
My risk on the trade is 235-230= 5$ times 100=$500- minus my max profit or 500-150=$350.00.
I am risking $350 to make $150 and I have a 85% probability of success.

Now if I sell a Put spread on the other end of the scale at the 85 percentile.
I sell a Put 170. For $5.00
I buy a Put at 175 for $3.5
My max profit is 500-350 or $150 or net credit.
My max loss is the distance between the two puts $5 multiplied by 100, $500 minus my max profit $150, = $350.0.

Now I get both the Put spread net credit $150.0 and the call spread net credit $150.0, but since the stock can only close above my calls or below my puts, I don’t risk two $350 dollar max losses, only one. So in essence one spread is riskless, so my broker doesn’t require me to tie up $350 times two or $700, only $350.
So that’s why I call these double dippers! I get a double helping of profit for a single helping of risk.

So that’s one reason that these are my one of my favorite spreads to trade. Now it’s complicated to set up because your buying and selling four positions and commissions can be high, but they are potentially so profitable, and modern trading software does all the purchasing for you.

I still close these trades early when possible to take my profits and eliminate my risk.
You have to remember that in options trading, when we are a seller of options we like volatility, which by definition means stock prices have wild swings and large moves.
Part of my strategy is to make lots of 50% profits and not lose my capitol. If I am always trading 5 point spreads, risking $500 and getting paid 150 to $200 dollar credits, I would rather make three 75 dollar winners in a month they risk the $500 hanging onto a $150 dollar premium until the end of expiration. Which also the reason I will close a 33% gainer that happens in the first week. Fortunately my broker doesn’t charge to close spreads and has very low fees to place spreads.

✍🏼 written by Shortsegments.


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