The iron condor is an advanced option trading strategy utilising two vertical spreads – a put spread and a call spread with the same expiration and four different strikes. If the outer strikes are bought and the inner strikes sold a long iron condor is produced. The converse produces a short iron condor. The number of call spreads will be equal to the number of put spreads.
The position is so named because of the shape of the profit/loss graph, which loosely resembles a large-bodied bird, such as a condor. In keeping with this analogy, traders often refer to the inner options collectively as the "body" and the outer options as the "wings". The word iron in the name of this position indicates that, like an iron butterfly, this position is played across the current spot price of the underlying instrument having one vertical spread below and one vertical spread above the current spot price. This distinguishes the position from a plain Condor position, which would be played with all strikes above, or below the current spot price of the underlying instrument. A Call Condor would be played with all call contracts and a Put Condor would be played with all put contracts.
One of the practical advantages of an iron condor over a single vertical spread (a put spread or call spread), is that the initial and maintenance margin requirements for the iron condor are often the same as the margin requirements for a single vertical spread, yet the iron condor offers the profit potential of two net credit premiums instead of only one. This can significantly improve the potential rate of return on capital risked when the trader doesn't expect the underlying instrument's spot price to change significantly.
Another practical advantage of the iron condor is that if the spot price of the underlying is between the inner strikes towards the end of the option contract, the trader can avoid additional transaction charges by simply letting some or all of the options contracts expire. If the trader is uncomfortable, however, with the proximity of the underlying's spot price to one of the inner strikes and/or is concerned about pin risk, then the trader can close one or both sides of the position by first re-purchasing the written options and then selling the purchased options.
Other articles related to "iron condor":
... An option trader who considers a short iron condor strategy is one who expects the price of the underlying to change greatly, but isn't certain of the direction of the change ... A strangle is effectively a short iron condor, but without the wings ... The short iron condor is a more expensive trade (higher net debit to be paid due to the absence of the outer strikes that typically reduce the net debit), but the ...
... The iron condor is a neutral strategy and consists of a combination of a bull put credit spread and a bear call credit spread (see above) ... Ideally, the margin for the Iron Condor is the maximum of the bull put and bear call spreads, but some brokers require a cumulative margin for the bull put and ... The return calculation for the Iron Condor position using the maximum margin of the bull put credit spread and the bear call credit spread and assuming price of the stock or index at ...
Famous quotes containing the words condor and/or iron:
“Of late, eternal Condor years
So shake the very Heaven on high
With tumult as they thunder by,
I have no time for idle cares
Through gazing on the unquiet sky.”
—Edgar Allan Poe (18091849)
“Ay, they heard his foot upon the stirrup,
And the sound of iron on stone,
And how the silence surged softly backward,
When the plunging hoofs were gone.”
—Walter De La Mare (18731956)