The iron condor credit spread strategy is used by stock market traders if they believe that a stock will probably trade sideways for a certain amount of time. Perhaps they expect small fluctuations up and down in the underlying stock price, however over another 30 days price action will remain relatively unchanged. When this is actually the case, equity option trades can make the most of what is recognized as time decay, or positive theta. What theta represents may be the decay in the worthiness of an out-of-the-money option as its expiration date approaches. The iron condor setup is simply the mix of a bull put spread and a bear call spread.stock options trading
This trade is initiated by selling out-of-the-money options and purchasing further out-of-the-money-options. Once structured, the trade will be given a net credit since the sold options make a greater premium than the cost of the purchased options. As time decay continues to wear at the worthiness of most options, the trade can potentially become profitable. However, sharp moves by the underlying stock to the upside or downside may cause the positioning to become a loss. The further from the money the purchased options are, the more the chance versus reward setup will increase. Simply, the more risk you take on for the trade, the more credit you are able to potentially receive at expiration.options market
We shall now create a good example of a metal condor trade and just how to implement one. Let's declare that Apple (AAPL) is trading at $620 per give 41 days to go until expiration. We believe it is highly probable that the stock will soon be trading between $580 and $640 at expiration. If we begin with the bull put spread, we'd want to buy the 580 put strike option for $4.40 and sell the 590 put strike option for $6.00. This provides us a net credit of $1.60. Next, we'd complete the iron condor position by setting up a bear call spread. To achieve this, we'd buy the 660 call strike option for $4.25 and sell the 650 call strike option for $6.20. This will give us a net credit of $1.95.
To calculate our overall risk and reward, we'd simply add up our total credits from each spread, which provides us $3.55. To calculate our risk for the trade, we'd subtract the credit received from the sum total difference in strike prices. Within our example would subtract $3.55 from $10.00, which provides us a total of $6.45 of risk. Therefore, we are able to calculate that trade offers the potential to make $3.55 for every single $6.45 we risk. Since one option contract represents 100 shares of the underlying stock, we've the ability to profit $355 at expiration while risking $645. Therefore, if Apple stock is trading between $590 and $650 per share at expiration this trade will soon be fully profitable.
The condor strategies are great to utilize in markets which are not experiencing a lot of volatility and neither the bulls nor the bears have a dominant stranglehold on the market. It's highly suggested to never execute a metal condor on a stock when earnings will occur within the period of time of the trade being open. Earnings are one of many single biggest drivers of stock price movements. Always be sure to check for upcoming earnings on the business you are considering opening this trade on. Also, be sure to identify clear quantities of support and resistance, as these can help identify high probability areas with which to set up your iron condor. Identifying the correct times to open this kind of trade allows a trade to profit when a stock is trending sideways. Because this really is so often the case with markets, to be able to properly execute the iron condor strategy is imperative to being fully a successful options trader.