The iron condor option strategy is a favorite among many option traders, including hedge funds, money managers, and individual investors. The options strategy is executed by simultaneously selling a bear call spread, and bull put spread. It gets its name due to the fact that the graph looks like a bird spreading its wings. There are four separate strike prices executed with this strategy, all of which have the same expiration month.
In most cases, this strategy is executed right in the middle between the inner strike prices, points B and C, while the distance between puts and the calls are roughly the same.
The draw of this strategy is the more substantial net credit received for selling both an out of the money call spread and out of the money put spread at the same time, but more conservative than a straddle or strangle, as max losses are capped.
Strategy
Investors who feel the stock price will not have much movement before expiration would execute an iron condor, allowing the investor to collect a larger premium. In addition, the margin required to execute an iron condor is the same as a single vertical spread, strangle option even though two vertical spreads are being executed here. The reason, the trader is guaranteed to win at least one side of the trade.
The iron condor is a favorite options trading strategy among many options traders due to its risk versus reward possibilities. A trader that executes an iron condor hopes that the underlying stock will have a narrow trading range so that the option falls between the two short strikes on expiration. long call option It can also be executed with slight bullish or bearish tendencies, depending on the range of the iron condor and its relation to the stock price.
It is almost always wise to take the position off a few days before expiration to avoid any unexpected movement in the stock, which could cause a winning trade turn into a losing trade. Remember, markets can move swiftly and without warning, and although the higher the implied volatility, the higher the net credit the trader can receive, the more volatile and riskier the trade will be. For this reason, it’s always smart to understand exactly what you’re risking and how you can adjust the trade should the market move against you.
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