Abstract:An iron condor options strategy allows traders to profit in a sideways market that exhibits low volatility. The iron condor is an option trading strategy created with four options consisting of two put options and two call options and four strike prices, all with the same expiration date.
An iron condor options strategy allows traders to profit in a sideways market that exhibits low volatility. The iron condor is an option trading strategy created with four options consisting of two put options and two call options and four strike prices, all with the same expiration date.
An iron condor is an options strategy that combines a bullish and bearish vertical spread on the same underlying stock. The aim is to benefit from the low volatility of the underlying asset . In other words, you make the maximum profit when the underlying asset closes between the strike prices on the expiry date of our trading strategy, making it a real trading system.
Options strategies in general have limited risk, the iron condor is no different as all four options create a trading system consisting of “wings” that protect our investment from instances of significant volatility in either direction. Because of this limited risk, your profit potential is also limited . The commission can be a considerable factor in this case, since there are four options at stake.
Among the most popular option strategies, the iron condor is very similar to the butterfly with differences in strike price. Options trading allows you to build a well-detailed strategy based on price volatility analysis and probability calculation .
How exactly does the iron condor options strategy work?
An iron condor works just like a strangle. A short strangle is a position that is a neutral strategy that profits when the stock stays between the short strikes as time passes, as well as any decreases in implied volatility. Specifically, the iron condor is developed as follows:
• Buy an out-of-the-money Put option with a strike price lower than the spot price of the underlying asset. The reason for this is to hedge our trading strategy against any major drop in the underlying asset.
• Sell the Put at the money option with a strike price closer to the current cost of the underlying asset.
• Sell the Call at the money option with a strike price just above the current price of the underlying asset.
• Buy a Call out of the money option with a strike price higher than the current price of the underlying asset.
The reason for this is to hedge our trading strategy against any major drop in the underlying asset.
Out - of-the-money options , called wings, are long positions. Since both options are out-of-the-money, their premiums are lower than those of the two written at-the-money options, so there is a net balance in the account when the trade is made.
Also, by selecting different strike prices, it ispossible to make the options strategy slightly bullish or slightly bearish . For example, if the average strike price is higher than the current price of the underlying asset, its price can be expected to rise slightly at expiration.
Hypothetical examples of the Iron Condor strategy
In order to highlight the components or steps involved in purchasing an Iron Condor, let's take the following two hypothetical examples:
10 options of XYZ Oct 85/95/110/120:
Sell 10 Call XYZ Oct 110
Buy 10 Call XYZ Oct 120
Sell 10 Put XYZ Oct 95
Buy 10 Put XYZ Oct 85
Potential Maximum Loss
In this case, the worst scenario would materialize, when the price of the underlying moves so far away from the strike price of our trading system that it reaches the extreme points : above 120 XYZ or below 85.
In summary, This strategy allows you to invest in the market with a neutral trend , something that many investors find quite convenient. This method is an options strategy that also allows you to hold positions with limited risk and a high probability of success .
Disclaimer:
The views in this article only represent the author's personal views, and do not constitute investment advice on this platform. This platform does not guarantee the accuracy, completeness and timeliness of the information in the article, and will not be liable for any loss caused by the use of or reliance on the information in the article.
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