April 28, by m slabinski. The iron condor not only has the coolest name of all option trading strategies, it also is one of the easiest trades to understand as a novice options trader. An iron condor is an options trading strategy that is made up of four options contracts, at four different strike prices. An iron condor is typically sold meaning that you receive a credit for the trade when you have a neutral market assumption about the underlying.
A sample iron condor in tastyworks. Notice the four legs and the green profit zone - the green profit zone is where you would make money on the trade. Typically an iron condor is sold when an underlying's implied volatility rank is high to take advantage of increased option premium. Depending on the implied volatility and the option prices, we can also potentially close out of the trade before expiration for a profit. If you trade on tastyworks, the profit area is marked by the green profit zones - seen pictured above.
If the underlying moves outside the green profit zones, into either of the red loss zones, you will lose money on the trade. Now let's make it a little more complex by breaking down an iron condor into its different components so you understand the fundamentals. An iron condor is a great trade for smaller accounts and beginners because you define your max loss when choosing strike prices at order entry.
Because it is a defined risk trade, it requires less buying power which frees up capital to place other trades. When selling each spread you will need to decide how wide to make the credit spreads. The width of the spread is the distance between the short and long strike prices. Your max profit is the credit received for selling the spread at order entry. To calculate the max loss for an iron condor, subtract the credit received from the width of the widest spread.
The wider the strike prices, the more credit you will receive for the trade, increasing your probability of profit and your max potential loss.
On the tastyworks curve page, try playing around with option strike prices to give yourself more or less credit. Notice how moving the long options further out of the money making the spread wider increases the credit received and probability of profit.
The last piece of information you need to understand an iron condor is where to place the call spread and where to place the put spread. The call spread is sold above higher strike prices the put spread and each spread is sold out of the money. When selling an iron condor in tastyworks you can set the width of vertical spreads and their distance from the current stock price by dragging the options or using the Strikes and Width buttons once the iron condor is on the trade screen.
If you are looking at an iron condor on the curve page, the out of the money put spread will be to the left of the stock price, and the out of the money call spread will be to the right.
If you are selling an iron condor, the options you sell will be closer to the stock price than the options you buy. The max loss would be: The max profit would be the total credit received from selling both spreads.
Notice how both spreads are about the same distance away from the current price of the stock. The iron condor seller hopes that the stock price will stay in between the short strikes prices. If the stock is in between the short strikes, above the short put and below the short call, at expiration all of the options will expire worthless.
You will see the profit area in green in tastyworks. That was a lot of information on iron condors Check out Step Up to Options to learn more trading strategies. Do you still have questions about iron condors?
Leave them in the comments or reach out to our support team at support tastytrade. Most investors are familiar with what earnings are, but less know about the different strategies and considerations when investing in a company with upcoming earnings.
In this post you will learn about what earnings are, the terminology associated with earnings, and how you can place an 'earnings trade. Strike price is an important options trading concept to understand. This post will teach you about strike prices and help you determine how to choose the best one. When To Use An Iron Condor Typically an iron condor is sold when an underlying's implied volatility rank is high to take advantage of increased option premium.
Iron Condor Mechanics An iron condor is a great trade for smaller accounts and beginners because you define your max loss when choosing strike prices at order entry. When you place an iron condor, you are selling two credit spreads: Setting Up An Iron Condor In tastyworks On the tastyworks curve page, try playing around with option strike prices to give yourself more or less credit. Short Put Vertica l:More...