Iron Condor Options - Iron Condor Strategy

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The Iron Condor Spread strategy is a neutral strategy similar to the Iron Butterfly. In the Iron Condor, an investor will combine a Bear-Call Credit Spread and a Bull-Put Credit Spread on the same underlying security. By doing this, an investor will potentially be able to double the credit obtained over a single spread position. Since there are two spreads involved in the strategy (four options), there is an upper break even and a lower break even. A profit is made if the stock remains above the lower break even point or below the upper break even point.

Enter a Bear-Call Credit Spread (Sell a Call at or out-of-the-money. Buy a Call one or more strikes above sold Call in the same target month).

Enter a Bull-Put Credit Spread in the same month, on the same stock (Sell a Put at or out-of-the-money. Buy a Put one or more strikes lower than Sold Put in the same target month).

An investor will receive a net credit from both positions. The total net credit is the max. profit. The max. profit is earned if the stock price remains above the sold put strike and below the sold call strike.

The upper break even is the sold call strike price plus the total net credit.

The lower break even is the sold put strike price minus the total net credit.

A profit is realized at any price above the lower break even or below the upper break even.

The max. risk is the difference in strike prices on either spread minus the net credit.

Advantages of this strategy:

This is a NEUTRAL strategy. A profit can be realized anywhere above the lower break even or above the upper break even.

The double credit achieved helps lower the potential risk.

The risk can be controlled by setting your spreads further OTM.

Potential returns are increased over a single Bear-Call or Bull-Put spread.

Losses are limited if the stock goes against you one way or the other.

If you are facing a large gain or drop in the underlying you could only close one leg of the four legs in the position.

No stock is actually owned (uncovered position).

Cautions with this strategy:

Commission costs to open the position are higher since there are four trades, might be cost prohibitive to trade iron condors that are low net credits.

For more information »» Read the "Iron Condor Article"

Iron Condor Options - Iron Condor Strategy - Iron Condor Help

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