By doing so, you create a trading range that, if the underlying stock stays within, can result in some pretty decent income.
And for clarification on any of the option terminology or definitions, be sure to consult the Options Trading Education resource page.
Specifically, you would write an out of the money put option and purchase a farther out of the money put option to form a bull put). This forms the lower boundary of the condor.
At the same time, you would also write an out of the money call option and purchase a farther out of the money call option to form a bear call. This in turn forms the upper boundary of the condor.
The trade produces a net credit. Actually, since it's formed with both a bull put and bear call, it produces two net credits. The maximum gain is the total amount of net credit received if the share prices finishes between the higher strike price put and the lower strike price call.
If you like the insurance company metaphor we used earlier on the bull put page, you can view the condor trade in similar terms. In this case, you're insuring a specific stock in another investor's portfolio from both increases AND decreases in share price. In effect, you're insuring against moves outside a pre-determined trading range.
As with bull put spreads and bear call spreads, there are three variables involved in this trade:
The XYZ Zipper Company is trading at $30/share.
Earnings season is still two months away and the company hasn't produced a controversy in quite some time. You feel confident that the stock won't stray very far from its current price in the near term.
You consult the stock's option chain and decide to employ an iron condor option trading strategy, setting up both a bull put spread and a bear call spread.
For simplicity's sake, let's assume that you set up both the bull put and bear call portions of the trade at the same time (although that isn't required), and all expiration dates are 30 days away:
To realize your maximum gain, you want XYZ to close at expiration anywhere in the $27.50-$32.50 range.
The table below illustrates the possible scenarios depending upon the stock's final share price.
|Share Price||Bull Put Portion||Bear Call Portion||Overall|
|$35.00+||Full Profit||Full Loss (less prem)||Loss Likely|
|$32.50-$35.00||Full Profit||Partial Loss||Profit or Loss|
|$27.50-$32.50||Full Profit||Full Profit||Full Profit|
|$25.00-$27.50||Partial Loss||Full Profit||Profit or Loss|
|$0.00-$25.00||Full Loss (less prem)||Full Profit||Loss Likely|
One other item to note: The bull put and the bear call portions of the trade are not required to be set up at the same time. In fact, many traders who employ this trade will set up one leg initially and then only later, if they feel it's advantageous, will they add the second leg.
Here's an interesting question to consider - Which is more risky and which is more rewarding - iron condors or individual bull put and bear call spreads?
KO - 125 shares
KMI - 100 shares
BP - 100 shares
MCD - 30 shares
JNJ - 25 shares
GIS - 25 shares
PAYX - 25 shares
Open Market Purchase Price: $20,071.83
Less Booked Option Income: $15,983.86
Tot. Discount: 79.63%
Adj. Div. Yield: 17.88%