iron condor

The iron condor credit spread strategy is employed by stock market traders once they feel that a stock is going to trade sideways for a certain amount 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 the case, equity option trades can make the most of what is called time decay, or positive theta. What theta represents may be the decay in the worthiness of an out-of-the-money option as its expiration date approaches. The iron condor setup is just the combination of a bull put spread and a bear call spread.options strategies

This trade is established by selling out-of-the-money options and purchasing further out-of-the-money-options. Once structured, the trade will receive a net credit since the sold options generate a higher premium than the price of the purchased options. As time decay continues to wear at the worthiness of all options, the trade could become profitable. However, sharp moves by the underlying stock to the upside or downside will cause the position to become a loss. The further from the money the purchased choices are, the more the chance versus reward setup will increase. Simply, the more risk you undertake for the trade, the more credit you are able to potentially receive at expiration.stock options trading

We shall now put up a good example of a metal condor trade and just how to implement one. Let's declare that Apple (AAPL) is trading at $620 per tell 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 start 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 gives us a net credit of $1.60. Next, we would complete the iron condor position by creating a bear call spread. To get this done, we would choose the 660 call strike selection for $4.25 and sell the 650 call strike selection for $6.20. This will give us a net credit of $1.95.

To calculate our overall risk and reward, we would simply add up our total credits from each spread, which provides us $3.55. To calculate our risk for the trade, we would subtract the credit received from the full total difference in strike prices. In our example would subtract $3.55 from $10.00, which provides us an overall total of $6.45 of risk. Therefore, we are able to calculate that this trade offers the potential to produce $3.55 for every single $6.45 we risk. Since one option contract represents 100 shares of the underlying stock, we've the capability 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 make use of in markets which are not experiencing plenty of volatility and neither the bulls nor the bears have a dominant stranglehold on the market. It is highly suggested to never execute a metal condor on a stock when earnings will occur within the time period of the trade being open. Earnings are one of many single biggest drivers of stock price movements. Always make sure you check for upcoming earnings on the organization you're considering opening this trade on. Also, make sure you identify clear quantities of support and resistance, as these could help identify high probability areas with which to create your iron condor. Identifying the proper times to open this type of trade allows a trade to profit when a stock is trending sideways. Because that is so usually the case with markets, being able to properly execute the iron condor strategy is crucial to being truly a successful options trader.