Long Iron Condor
You may consider a long iron condor when you expect the price of an underlying asset to move beyond a certain price range and want to limit risk.
Construction of the strategy
A long iron condor strategy involves trading four options of the same underlying asset.
● Sell a put1
● Buy a put2
● Buy a call1
● Sell a call2
Put1, put2, call1and call2 have the same expiration date but different strike prices.
Strike price: put1<put2<call1<call2, and put2-put1=call2-call1
Brief description
A long iron condor strategy consists of selling a put with the lowest strike, buying another put with the second lowest strike, buying a call with the second highest strike, and selling another call with the highest strike.
The distance between the calls is equal to that of the puts. All options have the same expiration date.
A long iron condor is also a combination of two strategies: a bull call spread and a bear put spread, or a long strangle and a short strangle.
This strategy potentially has limited maximum profit and limited risk before the contracts expire. You can potentially get the maximum profit if the asset price moves above the highest strike price or below the lowest strike price at expiration.
A long iron condor has a similar profit-loss pattern to the short call/put condor strategies. The difference is that the long iron condor is a net debit strategy, while the short call/put condor strategies are net credit strategies.
When using this strategy, you should pay attention to the cost (including commissions) because it includes at least four option trades. It is important to ensure a risk/reward ratio.
Gain & Loss
● Breakeven
Upside Breakeven = Second Highest Call Strike + Net Premium Paid.
Downside Breakeven = Second Lowest Put Strike - Net Premium Paid.
● Max gain
Max Gain = Highest Call Strike – Middle Higher Call Strike - Net Premium Paid
● Max loss
Net premium paid
Example
Suppose a theoretical stock called TUTU is on Nasdaq currently trading at $52.
You expect its price will very likely move above $56 or below $48. So you decide to use a long iron condor:
● Sell a $1 TUTU put with a strike of $46
● Buy a $2 TUTU put with a strike of $50
● Buy a $2 TUTU call with a strike of $52
● Sell a $1 TUTU call with a strike of $56
(The following calculations do not include transaction costs.）
This presentation is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. Read more
