PowerOptionsApplied - Iron Condor Return

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Making Money in Neutral Markets with Iron Condors and How to Calculate the Profits

A method for making money in a neutral stock market is with the Iron Condor. An Iron Condor is a neutral stock options strategy and consists of a combination of a Bull-Put credit spread and a Bear-Call credit spread. A credit spread trade is entered by selling stock options and simultaneously purchasing stock options.

A Bull-Put credit spread is entered by selling a put option short and purchasing a put option at a lower strike price. The difference between the price of the short option and the long options is the initial net credit, and if the price of the underlying is above the strike price of the short put options at expiration, both options, long and short, expire worthless and the initial net credit is retained for a profit.

The maximum potential return for a Bull-Put credit spreads is calculated as:

(Initial Net Credit per Contract *100%)
-----------------------------------------------------------------------------------------
(Spread Between Option Strike Prices - Initial Net Credit per Contract)

As an example, consider a Bull-Put credit spread for the OEX index consisting of the short put option OEWTR (09 Aug 390) with bid price of $1.95 and long put option OEWTO (09 Aug 375) with ask price of $1.25. The distance between the strike prices is $15 and the net credit is $0.70, so the return is calculated as {$0.70/($15-$0.70)} or 4.9%

A Bear-Call credit spread is entered by selling a short call option and purchasing a long call option with a higher strike price. For the Bear-Call credit spread, if the price of the underlying is below the price of the strike price of the short call option at expiration, the options expire worthless and the initial net credit is retained as profit. The calculation for the return of the Bear-Call credit spread is the same as the calculation shown above for the Bull-Put credit spreads.

Some brokers offer special margin for Iron Condors, as only the Bull-Put credit spread or the Bear-Call credit spread, not both, can result in a loss. The Bull-Put credit spread and the Bear-Call credit spread cannot simultaneously result in a loss, one will always result in a profit, although the aggregate position may result in a loss.

Typically, to receive special margin consideration, an Iron Condor must have a difference between the strike prices of the put options for the Bull-Put credit spread and the call options for the Bear-Call credit spread, which are identical. Additionally, to receive special margin consideration, the stock options must all have the same month of expiration.

The potential return for an Iron Condor with special margin is the same as for the Bull-Put credit spread and the Bear-Call credit spread as shown above. The table shown below has been included for easy calculation of the return for an Iron Condor with special margin consideration. The table shown below can also be used for calculating the potential returns of Bull-Put credit spreads and Bear-Call credit spreads. The table below can be used to aid you in managing your option trading risks for Iron Condors with special and for Bull-Put credit spread and Bear-Call credit spread positions.

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Separation Between Option Strike Prices

Net
Cred.
per
Con. $1 $2 $3 $4 $5 $6 $7 $8 $9 $10 $15 $20 $25 $50

$0.05 5.3% 2.6% 1.7% 1.3% 1.0% 0.8% 0.7% 0.6% 0.6% 0.5% 0.3% 0.3% 0.2% 0.1%

$0.10 11.1% 5.3% 3.4% 2.6% 2.0% 1.7% 1.4% 1.3% 1.1% 1.0% 0.7% 0.5% 0.4% 0.2%

$0.15 17.6% 8.1% 5.3% 3.9% 3.1% 2.6% 2.2% 1.9% 1.7% 1.5% 1.0% 0.8% 0.6% 0.3%

$0.20 25.0% 11.1% 7.1% 5.3% 4.2% 3.4% 2.9% 2.6% 2.3% 2.0% 1.4% 1.0% 0.8% 0.4%

$0.25 33.3% 14.3% 9.1% 6.7% 5.3% 4.3% 3.7% 3.2% 2.9% 2.6% 1.7% 1.3% 1.0% 0.5%

$0.30 42.9% 17.6% 11.1% 8.1% 6.4% 5.3% 4.5% 3.9% 3.4% 3.1% 2.0% 1.5% 1.2% 0.6%

$0.35 53.8% 21.2% 13.2% 9.6% 7.5% 6.2% 5.3% 4.6% 4.0% 3.6% 2.4% 1.8% 1.4% 0.7%

$0.40 66.7% 25.0% 15.4% 11.1% 8.7% 7.1% 6.1% 5.3% 4.7% 4.2% 2.7% 2.0% 1.6% 0.8%

$0.45 81.8% 29.0% 17.6% 12.7% 9.9% 8.1% 6.9% 6.0% 5.3% 4.7% 3.1% 2.3% 1.8% 0.9%

$0.50 100% 33.3% 20.0% 14.3% 11.1% 9.1% 7.7% 6.7% 5.9% 5.3% 3.4% 2.6% 2.0% 1.0%

$0.55 37.9% 22.4% 15.9% 12.4% 10.1% 8.5% 7.4% 6.5% 5.8% 3.8% 2.8% 2.2% 1.1%

$0.60 42.9% 25.0% 17.6% 13.6% 11.1% 9.4% 8.1% 7.1% 6.4% 4.2% 3.1% 2.5% 1.2%

$0.65 48.1% 27.7% 19.4% 14.9% 12.1% 10.2% 8.8% 7.8% 7.0% 4.5% 3.4% 2.7% 1.3%

$0.70 53.8% 30.4% 21.2% 16.3% 13.2% 11.1% 9.6% 8.4% 7.5% 4.9% 3.6% 2.9% 1.4%

$0.75 60.0% 33.3% 23.1% 17.6% 14.3% 12.0% 10.3% 9.1% 8.1% 5.3% 3.9% 3.1% 1.5%

$0.80 66.7% 36.4% 25.0% 19.0% 15.4% 12.9% 11.1% 9.8% 8.7% 5.6% 4.2% 3.3% 1.6%

$0.85 73.9% 39.5% 27.0% 20.5% 16.5% 13.8% 11.9% 10.4% 9.3% 6.0% 4.4% 3.5% 1.7%

$0.90 81.8% 42.9% 29.0% 22.0% 17.6% 14.8% 12.7% 11.1% 9.9% 6.4% 4.7% 3.7% 1.8%

$0.95 90.5% 46.3% 31.1% 23.5% 18.8% 15.7% 13.5% 11.8% 10.5% 6.8% 5.0% 4.0% 1.9%

$1.00 100% 50.0% 33.3% 25.0% 20.0% 16.7% 14.3% 12.5% 11.1% 7.1% 5.3% 4.2% 2.0%

$1.05 53.8% 35.6% 26.6% 21.2% 17.6% 15.1% 13.2% 11.7% 7.5% 5.5% 4.4% 2.1%

$1.10 57.9% 37.9% 28.2% 22.4% 18.6% 15.9% 13.9% 12.4% 7.9% 5.8% 4.6% 2.2%

$1.15 62.2% 40.4% 29.9% 23.7% 19.7% 16.8% 14.6% 13.0% 8.3% 6.1% 4.8% 2.4%

$1.20 66.7% 42.9% 31.6% 25.0% 20.7% 17.6% 15.4% 13.6% 8.7% 6.4% 5.0% 2.5%

$1.25 71.4% 45.5% 33.3% 26.3% 21.7% 18.5% 16.1% 14.3% 9.1% 6.7% 5.3% 2.6%

$1.30 76.5% 48.1% 35.1% 27.7% 22.8% 19.4% 16.9% 14.9% 9.5% 7.0% 5.5% 2.7%

$1.35 81.8% 50.9% 37.0% 29.0% 23.9% 20.3% 17.6% 15.6% 9.9% 7.2% 5.7% 2.8%

$1.40 87.5% 53.8% 38.9% 30.4% 25.0% 21.2% 18.4% 16.3% 10.3% 7.5% 5.9% 2.9%

$1.45 93.5% 56.9% 40.8% 31.9% 26.1% 22.1% 19.2% 17.0% 10.7% 7.8% 6.2% 3.0%

$1.50 100% 60.0% 42.9% 33.3% 27.3% 23.1% 20.0% 17.6% 11.1% 8.1% 6.4% 3.1%

$1.55 63.3% 44.9% 34.8% 28.4% 24.0% 20.8% 18.3% 11.5% 8.4% 6.6% 3.2%

$1.60 66.7% 47.1% 36.4% 29.6% 25.0% 21.6% 19.0% 11.9% 8.7% 6.8% 3.3%

$1.65 70.2% 49.3% 37.9% 30.8% 26.0% 22.4% 19.8% 12.4% 9.0% 7.1% 3.4%

$1.70 73.9% 51.5% 39.5% 32.1% 27.0% 23.3% 20.5% 12.8% 9.3% 7.3% 3.5%

$1.75 77.8% 53.8% 41.2% 33.3% 28.0% 24.1% 21.2% 13.2% 9.6% 7.5% 3.6%

$1.80 81.8% 56.3% 42.9% 34.6% 29.0% 25.0% 22.0% 13.6% 9.9% 7.8% 3.7%

$1.85 86.0% 58.7% 44.6% 35.9% 30.1% 25.9% 22.7% 14.1% 10.2% 8.0% 3.8%

$1.90 90.5% 61.3% 46.3% 37.3% 31.1% 26.8% 23.5% 14.5% 10.5% 8.2% 4.0%

$1.95 95.1% 63.9% 48.1% 38.6% 32.2% 27.7% 24.2% 14.9% 10.8% 8.5% 4.1%

$2.00 100% 66.7% 50.0% 40.0% 33.3% 28.6% 25.0% 15.4% 11.1% 8.7% 4.2%

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