Iron Condor

The iron condor is a limited risk, limited reward option trading strategy. It can be visualized as a combination of a bull put spread and bear call spread.

 

 

 

Sell 1 OTM Put

Buy 1 OTM Put (Lower Strike)

Sell 1 OTM Call

Buy 1 OTM Call (Higher Strike)

 

Example

Suppose XYZ is trading at $55 and the lot size of an option contract is 100. A trader enters an iron condor by buying a put at a strike price of $45 for $50, while writing a put at a strike price of  $50 for $100, and writing a call at a strike price of  $60 call for $100 and buying call at $65  for $50. The net credit received when entering the trade is $100.

 

Case 1:

If stock XYZ is still trading at $55. All the 4 option expire worthless and the options trader keeps the entire credit that is  $100 as a profit. This is also his maximum profit.

 

Case 2:

If the stock is trading at $45 on expiration, all the options except the put sold with a strike price of $50 expires worthless. This put has an intrinsic value of $500. Thus subtracting this loss from his initial credit, that is $100, the options trader suffers his maximum possible loss of $400. This maximum loss situation would also occur had the stock price go up to $55.