What is an iron condor?

December 3, 2014 / OptionsANIMAL

Video Transcription

Okay so today we’re talking about the common question, what is an iron condor? This is a very popular strategy when it comes to trading options. The best way to answer this, that it involves to credit spreads, so on top you have a call spread. Let’s just say that you have first off, a stock we’ll just call it XYZ stock that’s trading at 110. The call spread, you’re selling a call option at 120, let’s say you get paid $0.65 for that option. You’re buying a call option at 125, up above. You’re paying less for that so let’s say you pay $0.30. Your total credit here would be $0.35 on the call spread. So, all you need is within say a 30-day timeframe, that’s typically when people do these. You just need this stock to stay below 120, and you’ll capture this $0.35 so, that’s just the call spread, that’s the bear call.

Now the other half of an iron condor is the put spread, or the bull put as they call it. You’re going to sell a put at say strike price 100, maybe you get paid $0.60 for that, and then what you do is buy a put at say 95. Going to cost you some money so let’s just say it cost you $0.35, you get paid maybe $0.25 credit on the put spread. And now all you need is the stock, XYZ stock to stay above 100 and you’re going to keep this $0.25 credit. So, if you’re putting two and two together really we just need this stock to stay somewhere in this range. And as long as it stays in that range within a 30-day timeframe, you’ll capture the credit up top and the credit on the bottom, it’s a really good way to target a consistent income from the stock market.

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