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The iron condor credit spread strategy is employed by stock market traders when they believe that an inventory will trade sideways for a quantity 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 known as time decay, or positive theta. What theta represents is the decay in the worthiness of an out-of-the-money option as its expiration date approaches. The iron condor setup is merely the mix of a bull put spread and a bear call spread.trading options
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 as the sold options generate a greater premium than the price 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 will cause the positioning becoming a loss. The further out from the money the purchased choices are, the more the danger 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 strategies
We shall now put up a good example of an iron condor trade and how exactly to implement one. Let's declare that Apple (AAPL) is trading at $620 per share with 41 days to go until expiration. We believe that it is highly probable that the stock is going to be trading between $580 and $640 at expiration. If we begin with the bull put spread, we would want to get the 580 put strike selection for $4.40 and sell the 590 put strike selection for $6.00. This provides us a net credit of $1.60. Next, we would complete the iron condor position by setting up a bear call spread. To do this, we would purchase the 660 call strike selection for $4.25 and sell the 650 call strike selection for $6.20. This could give us a net credit of $1.95.
To calculate our overall risk and reward, we would simply accumulate our total credits from each spread, which gives us $3.55. To calculate our risk for the trade, we would subtract the credit received from the sum total difference in strike prices. In our example would subtract $3.55 from $10.00, which gives us an overall total of $6.45 of risk. Therefore, we are able to calculate that this trade provides 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 capacity to profit $355 at expiration while risking $645. Therefore, if Apple stock is trading between $590 and $650 per share at expiration this trade is going to be fully profitable.
The condor strategies are great to work with in markets that are not experiencing lots of volatility and neither the bulls nor the bears have a dominant stranglehold on the market. It's highly suggested never to execute an iron condor on an inventory when earnings will occur within the timeframe of the trade being open. Earnings are among the single biggest drivers of stock price movements. Always be sure to check for upcoming earnings on the company you're considering opening this trade on. Also, be sure to identify clear levels of support and resistance, as these could help identify high probability areas with which to create your iron condor. Identifying the right times to open this sort of trade allows a trade to profit when an inventory is trending sideways. Because this is so the case with markets, being able to properly execute the iron condor strategy is crucial to being fully a successful options trader.