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Iron Condors

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Iron Condors are highly similar to regular condors, but utilize a mix of puts and calls to construct the position. Iron Condors consist of two outer options and two inner options combined into two spreads which face each other. The stock price will be somewhere between the two inner options. The two lowest strike price options are puts, and the two highest strike price options are calls. The underlying asset price will be in between the put and the call which create the middle of the iron condor. This is usually dead center at the condor’s creation. If the Iron condor’s center is above the underlying price, it is a bullish long position and a bearish short position. If the iron condor’s center is below the underlying price, it is a bearish long position and a bullish short position.

Long Iron Condors

How To Read/Interpret Option Diagram
For Long Iron Condors, the outer put and outer call are purchased and the inner put and inner call are sold. This results in an initial debit paid for the position. If the stock price remains between the two center options, the play results in maximum profits. Long iron condor buyers need the price to stay in this zone. If it moves between a mid-point and an outer point it will result in some profit or some loss. If it moves beyond an outer point it will result in complete loss.

Short Iron Condors

How To Read/Interpret Option Diagram
For Short Iron Condors, also known as a Reverse Iron Condors, the outer put and outer call are sold and the two inside options are purchased. If price is dead center it is neutral, if it is below dead center it is bearish, and if it is above dead center it is bullish. If the stock price remains between the two center options, the play results in maximum loss. If it moves between a mid-point and an outer point it will result in some profit or some loss. If it moves beyond an outer point it will result in maximum profit. Short iron condor sellers need a wide price swing to acquire profit from a trade. Due to the wide amount of movement required and capped upside profit, short condor sellers might consider long straddles or long strangles instead of this play. These alternative plays also remove the possibility of being assigned to an exercise, which ruins the trade. They open the trader to vulnerability of time value loss if movement does not occur.

Strike Price & Profitability

In both cases, the width between an outer point and its closest inner point should be the same on both sides. The distance between the inner points can be widened or narrowed for effectiveness, but it will affect the cost or premium earned to open the position, and thus the losses and profits earned.

Iron Condors & Assignment Risk

Iron Condors can be completely dismantled if either sold option is assigned early. The risk is highest if a long condor is above a single purchased and two sold options. If you are assigned on either of the two short options, you may be forced to unwind a large portion of the condor or close the position entirely in a zone of relatively low value or loss. Many use condors on index options, which are European options that cannot be exercised early. These options usually have low volatility, which increases the likeliness they will finish inside of a long condor. You can increase the chances of condors being successful by measuring the standard deviation of price movement, and then opening the condor with the outer boundaries near or outside of that range, if profitable.

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Option Profit Diagram Example

  • As you move to the right the underlying asset increases in value. The left side is lower in underlying price, while the right side is higher in underlying price.
  • As you move to the top the trade increases in profit. The gray horizontal line is the profit/loss difference point, the zero line where there is no profit and no loss. Higher above the line is higher in profit, lower below the line is higher in losses.
  • The blue line is the profit/loss at expiration. The purple line is the profit/loss now. Eventually the curving purple line will become the blue line.
  • A flat blue line below the grey zero line indicates limited losses at expiration. A flat blue line above the grey zero line indicates limited gains at expiration. A blue line that slopes down infinitely off the chart represents unlimited losses, while a line that slopes infinitely up represents unlimited gains.
  • A preference for limited loss trades is strongly recommended, remember that an estimated 60% to 70% of retail trader options expire worthless when purchased since prices need a reason to move in the money. If you have limited gains, they should preferably be both more likely than and higher than your potential losses. Always manage risk carefully.
  • Option diagrams created by TDAmeritrade “ThinkOrSwim” platform.