Iron Condor

The condor spread is one of the lesser known and/or used option spread strategies.

While the name is similar to the more popular ‘iron condor’ strategy - the ‘condor spread’ is different - even while the risk graph of the trade looks the same.

The difference between the condor and the iron condor is that the condor spread is constructed of all calls or puts - while the ‘iron condor’ is comprised of BOTH call options and put options.

An iron condor example on IBM looks as following:

Buy 2 110 IBM Puts
Sell 2 115 IBM Puts
Sell 2 125 IBM Calls
Buy 2 130 IBM Calls

The iron condor example above utilizes both calls and puts - and it is constructed of 2 separate credit spreads.

A condor example on the same underlying would look as follows -

Buy 2 110 IBM Puts
Sell 2 115 IBM Puts
Sell 2 125 IBM Puts
Buy 2 130 IBM Puts

The condor example above uses ONLY puts - and is composed of a put debit spread as well as a put credit spread.

While constructed differently however - if you were to compare these two option spread strategies next to each other on a risk graph or payoff diagram - they would look extremely similar if not identical.

photo credit: edenpictures

Technorati Tags: Butterfly Spread, condor spread, Credit Spread, Iron Condor, iron condor spread, iron condors, option selling, option spread trading, Vertical Spread

Several different option spread trading strategies which investors can use for creating monthly income include the iron condor, credit spread (or vertical spread) - the butterfly spread - and others.

Option spread trading refers to the act of selling one option and buying one option. In the case of the iron condor strategy - these options would usually be in the same month. Credit spread option strategy would include the same month options as well - and the options would either be all calls or all puts. Diagonals would be comprised of the same underlying - however the months could be different months - and the same is true with calendar spreads.

Non directional trading investors find option spread  trading enticing because it is a way for them to use leverage to benefit from the theta decay of options while limiting their risk. These trades allow the option trader to sell premium and collect that theta - while purchasing cheap ‘insurance’ to cover themselves in a worse case scenario.

Option spread trading has become fairly popular recently and more and more retail traders are getting their feet wet in this type of investing - whereas not too long ago these type of option spread strategies were little known and traded only by professionals.

photo credit: pfala

Technorati Tags: butterlfy spread, Credit Spread, Iron Condor, iron condor spread, iron condors, option selling, option spread trading, Vertical Spread

At the core of the iron condor strategy is the vertical spread.

If we were to reverse engineer the iron condor strategy - take it apart - split it in half - and look at what the spread is actually constructed from - we would find that it is simply 2 credit spreads. A vertical spread on either side.

Usually the iron condor trader will construct their trade anywhere from 1 to 3 months away from expiration day. For example - if an iron condor trader were setting up a March trade - the trade might be initiated as early as Jan of that year. I think most iron condor traders would agree that this might be as far away from expiration one might want to place this type of trade - and it seems as though most prefer to place them much closer to expiration day - usually somewhere in the 30 to 40 day range.

To place an iron condor trade - the investor would either sell 2 separate vertical spread - or credit spread - an equal distance away - or out of the money - from where the ETF they are trading with is presently trading at.

For example - if the investor were placing an iron condor on the SPY - they would sell a call vertical spread above where the SPY is trading at - and they would sell a put vertical spread below where the SPY is trading at.

These two individual credit spreads can be sold either one at a time - which some refer to as ‘legging in’ - or some brokers allow them to all be placed together as a full iron condor ‘package’.

photo credit: Orin Zebest

Technorati Tags: Butterfly Spread, Credit Spread, Iron Condor, iron condor spread, iron condors, option selling, option spread trading, Vertical Spread

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Option selling has become more main stream recently as more and more retail traders learn about the various option spread trading strategies which can provide actually quite impressive returns over short periods of time.

Option selling is the act of an investor ’selling’ an option - either call or put - to bring a credit into their account. The trader doesn’t necessarily have to own the option prior to selling it - or even own a related base asset such as the stock that the option is derived from (such as is the case with covered call selling)

Even though the investor may not need to own the option first - or a related asset - in most cases the investor DOES need to have enough cash in their account to ‘cover’ the sold option if it were assigned - or they could also cover it by purchasing another nearby option - such as would be done in the case of a credit spread option position - or a debit spread.

Some popular option selling strategies include:

Iron Condor
Credit Spread
Butterfly Spread

Option selling is a great way for investors to benefit from the fact that options are a decaying asset.

photo credit: TheTruthAbout…

Technorati Tags: Butterfly Spread, Credit Spread, Iron Condor, iron condor spread, iron condors, option selling, option spread trading, Vertical Spread

An option selling strategy that has gained a lot of popularity in recent years is the iron condor.

This option spread trading method is comprised of two vertical spreads - or credit spreads - on the same underlying stock / ETF / index. It is made up of an out of the money bear call spread - a credit spread option trade that benefits when the underlying asset remains below the sold short strikes - and a bull put spread on the opposite side of the position.

While there are numerous ways to trade the iron condor option spread trading technique - one popular way is to sell the shorts on either side as far away as possible with the hope being that while the trade is in progress the stock / index vehicle being used won’t reach those levels - which the probabilities say they shouldn’t.

Although it is true that this trade is a high probability trade and when placed correctly the trading asset being used should not breach either sold strike of the trade - of course this is always a possibility - and the risk on these trades can be significant.

Regardless of the favorable probabilities traders of the iron condor option trading strategy should always have a risk management plan in place before putting on these trades.

photo credit: James Byrum

Technorati Tags: Butterfly Spread, Credit Spread, Iron Condor, option selling, option spread trading, Vertical Spread

Similar to an iron condor spread trade, the Condor (without the ‘iron’) is a four legged trade made up of all calls or all puts.

Here is an illustration of a condor spread -

Go long 4 50 Calls
Go short 4 55 Calls
Go short 4 60 Calls
Go long 4 65 Calls

The risk profile of this looks similar to that of the iron condor.

Also - if once one takes a good look at the trade, it also could be argued that this trade is a split strike butterfly trade - or a traditional butterfly trade where the shorts being sold are separated.

Finally - the condor trade - like the one illustrated above - is also a common adjustment technique used by iron condor traders to ‘roll’ the side that is in trouble further away from a threatening move.

For example, in the illustration above, of an iron condor trader had a trade on where the call side was made up of a sold 50 / 55 call credit spread - and it was being threatened - a way that trader could adjust the trade would be to roll the threatened credit spread further up away from the underlying.

To do this in one simple trade would be to place the trade described above - which would wind up moving the 50 / 55 call credit spread up to a 60 / 65 call credit spread.

Technorati Tags: Butterfly Spread, condor spread, Credit Spread, Iron Condor

If one were to take the iron butterfly spread apart - reverse engineer it if you will - then take a look at the components - they could come to the determination that the butterfly spread trade is basically a straddle spread - with cheaper wings purchased for protection.

At the core of the trade - it’s just the sale of a straddle. It’s what the iron butterfly spread trade really wants to be.

Following is an example of an iron butterfly trade:

Purchase 1 36 Put
Sell 1 38 Put
Sell 1 38 Call
Purchase 1 40 Call

If you remove the 2 purchased options - the 36 put and the 40 call what is left?

The short 39 put and the short 38 call. A sold straddle.

This straddle is what makes this trade money. The purpose of the 2 purchased wings is to provide protection and margin relief.

photo credit: sidewalk flying

Technorati Tags: Butterfly Spread, Credit Spread, Iron Condor, straddle spread

A variety of individual butterfly strategies are in the option income traders ‘toolbox’ for use - including the ‘regular’ butterfly consisting of either calls or puts, the iron butterfly position, and the broken wing butterfly - or ’skewed’ butterfly.

The ‘regular’ or traditional butterfly is made up of either all calls or put options. These are usually constructed with the short strikes being sold at or near where the stock or underlying investment vehicle is currently trading at. The wings of this version of the butterfly spread are bought out an equidistant length away from where the shorts were sold.

An Iron Butterfly could actually be viewed as an iron condor - it is made up just like an iron condor trade -  the difference being that the shorts are sold at the same strike price as each other - as if attached together. One could think of this trade as an iron condor just ‘pushed’ together in the middle.

The broken wing butterfly can be made up of puts, calls - or both calls and puts. What makes this trade different is that both wings are not spaced apart equally on either side. One wing is shorter than the opposite side - making this trade ’skewed’.

Usually traders consider the butterfly spread trade to be a non directional trade - however these trades can also be constructed to be played directionally.

photo credit: Diganta Talukdar

Technorati Tags: Butterfly Spread, butterfly strategies, Credit Spread, Iron Condor

Butterfly Spread Trade - March 2010 - RUT

This last week we closed out our RUT Iron Butterfly Trade for a profit of just over 10%.  Total days in trade: 8 days.

Learn more on these butterfly spread trades.

Technorati Tags: Butterfly Spread, Credit Spread, Iron Condor, Vertical Spread