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Vertical Spread

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Just Doors

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’.

Creative Commons License photo credit: Orin Zebest

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