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Options Strategy – Long Iron Condor


A Long Iron Condor is an options trading strategy that involves four different options contracts with the same expiration date but different strike prices. This strategy is used when a trader expects low volatility and anticipates that the underlying asset’s price will remain within a specific range.

How It Works

  1. Buy a Lower Strike Put Option: The trader buys one put option with the lowest strike price.
  2. Sell a Middle-Low Strike Put Option: The trader sells one put option with a higher strike price.
  3. Sell a Middle-High Strike Call Option: The trader sells one call option with an even higher strike price.
  4. Buy a Higher Strike Call Option: The trader buys one call option with the highest strike price.
  5. Profit and Loss: The maximum profit is achieved if the underlying asset’s price remains between the middle strike prices at expiration. The maximum loss occurs if the price falls below the lowest strike or rises above the highest strike.

Example of a Long Iron Condor Strategy

Let’s say you expect Company XYZ, currently trading at $100, to stay within a $90 to $110 range by the expiration date. You decide to implement a Long Iron Condor with the following specifics:

  • Buy Lower Strike Put: Strike Price $85, Premium Paid $2 per share
  • Sell Middle-Low Strike Put: Strike Price $90, Premium Received $3 per share
  • Sell Middle-High Strike Call: Strike Price $110, Premium Received $3 per share
  • Buy Higher Strike Call: Strike Price $115, Premium Paid $1 per share
  • Expiration Date: 1 month from now

You trade one lower strike put, one middle-low strike put, one middle-high strike call, and one higher strike call option contract, each representing 100 shares. Your total net premium received (premiums received from sold options minus premiums paid for bought options) is:

($3+$3)−($2+$1)=$6−$3=$3 per share

Your total net premium received for 100 shares is:

100 shares×$3=$300

Scenarios

  1. Stock Price Between $90 and $110 (Middle Range)
    If, at expiration, the stock price is between $90 and $110:
    • Lower Strike Put: Out of the money, expires worthless.
    • Middle-Low Strike Put: Out of the money, expires worthless.
    • Middle-High Strike Call: Out of the money, expires worthless.
    • Higher Strike Call: Out of the money, expires worthless.
    • Net Profit: Total premium received ($300) is the maximum profit.
  1. Stock Price Below $85 or Above $115
    If, at expiration, the stock price is below $85 or above $115:
    • Lower Strike Put: In the money, exercised, leading to a payout.
    • Middle-Low Strike Put: In the money, exercised, leading to a payout.
    • Middle-High Strike Call: In the money, exercised, leading to a payout.
    • Higher Strike Call: In the money, exercised, leading to a payout.
    • Net Loss: Maximum loss is the difference between the middle and lower/higher strike prices minus the net premium received.
  1. Stock Price Between $85 and $90 or Between $110 and $115
    If, at expiration, the stock price is between $85 and $90 or between $110 and $115:
    • Lower Strike Put: In the money, exercised, leading to a payout.
    • Middle-Low Strike Put: Out of the money, expires worthless or in the money, exercised.
    • Middle-High Strike Call: Out of the money, expires worthless or in the money, exercised.
    • Higher Strike Call: In the money, exercised, leading to a payout.
    • Net Profit/Loss: Depends on the exact stock price, with maximum profit achieved within the middle range and potential loss if the price moves outside the middle range.

Benefits of Long Iron Condor Strategy

  • Limited Risk: The maximum loss is limited to the difference between the lower/middle and middle/higher strike prices minus the net premium received.
  • Defined Profit Range: The maximum profit is achieved if the stock price remains within the middle strike prices at expiration.

Risks of Long Iron Condor Strategy

  • Limited Profit Potential: The profit is limited to the net premium received.
  • Low Volatility Required: This strategy is effective only if the underlying asset’s price remains relatively stable within the defined range.

The Long Iron Condor strategy is a conservative options trading approach that allows traders to capitalize on low volatility with limited risk.

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