An iron condor is a type of option trading strategy with four different contracts—selling two options and buying two options—but works as a single trade. It involves two put spreads (bear) and two call spreads (bull). It is typically traded as out-of-the-money options because they have lower premiums compared to at-the-money options. There are different variations as to one person want to trade this. You can mix at-the-money options with out-of-the-money options.
This would work in your favor if the specific stock you traded maintain its price in a certain range before all the option expires. The expiration dates may vary—you could choose to expire the trade in a matter of days, or you could choose even a month or two. But the longer the expiration date is, the higher the value of the trade. This is considered as a neutral trade, as you are rooting for the stock to be neither bullish nor bearish.
Trading iron condor could be perfect for new or under-capitalized traders as it does not require a high capital.
How an iron condor trading works
Iron condor trading starts by selling to open out-of-the-money put and selling to open out-of-the-money call. The put option is the stock price lower than the current market price of the stock, while the call option is the stock price higher than the current price of the stock. Both should have the same expiration date. You would want the stock price to stay within the strikes of the put and call you are selling.
For the second part, you would have to buy an open out-of-the-money put and call. Just remember that the put and call spreads should have an equal width. For instance, you are selling 55 puts and buying 65 puts, both for a certain price. The call that you are selling could be anywhere above the current stock price, which is at 75, for example. You could sell 85 puts for a specific cost. In order to match the put spread, you should buy 95 calls for a definite value. This creates a safety window for you, as for the example mentioned, the put and call options are 10 points apart.
Though the spreads should be equal, it does not entirely mean that the strikes you are selling should remain the same. You could go for wider strike prices as this could mean higher credit (higher profit). But this could also indicate an increase in the maximum potential loss. But the good thing is that no matter how far the prices go out of your safe range, you would always have the same amount of potential loss. In the end, it is still less risky than other types of trading.
The trader could earn the maximum profit if the price of the stock remained within the range of the call and put that you are selling. The maximum profit you could get is the net credit you received when you get into the trade—the price of the put and the call you sold.
With the ongoing tariff war between two of the biggest economies in the world, you could say that stock trading is in a volatile position. But with an option strategy like an iron condor, you could still utilize trading to earn more profits.
Côte d’Ivoire at the time of the economic balance sheet
Record economic growth, but insufficient social policy and persistent poverty characterize the economic and social record of Alassane Ouattara's decade...
Crowdfunding campaigns to save Swiss restaurants
The organization Best of Swiss Gastro wants to save the Swiss gastronomy with crowdfunding. The company is donating part of...
EU Bonds: A safe haven for institutional investors?
For the first time, the EU issued bonds in October 2020 to mitigate the damage caused by the COVID-19 pandemic....
N26 introduces penalty interest on balances over €50,000
N26 recently announced that will introduce a custodian fee of 0.5% on transactions over $59,000 (€50,000). Custodian fees in Germany...
Virtual reality in the classroom: How XRApplied is making it happen
A large body of research is making a case for the revolutionary benefits of putting AR and VR in the...
Cannabis7 days ago
What types of licenses for the production of cannabis will be granted in Ecuador
Featured7 days ago
How can HRD pave its way in the evolving world of FinTech?
Biotech7 days ago
SparingVision closes a €44.5 million round and gives entry to Ysios Capital
Cannabis6 days ago
Canopy Growth expands beverage business in the USA with BioSteel