Disposition: Neutral (time decay)
How it Works
When executing an iron condor, the trade will consist of two puts (one long and one short), two calls (one long and one short), and four strike prices. All contracts will have the same expiration date. The goal for this trade is low volatility. In other words, maximum profit will be achieved by the ticker closing between the two sold contracts.
Like other multi leg option strategies, this trade has a limited potential for profit and loss. The profit will be limited to the initial credit received while the loss is maxed at the difference between the bought and sold call strikes + the bought and sold put strikes minus the initial credit when opening the trade.
Let’s say that we believe QQQ will trade relatively flat over the next month. QQQ is currency trading at $303 and the date is May 24.
STO 1 QQQ 24JUN WEEKLY 305.00 CALLS OTM Call (higher than market price)
BTO 1 QQQ 24JUN WEEKLY 310.00 CALLS OTM Call (protection against positive price action)
STO 1 QQQ 24JUN WEEKLY 300.00 PUTS OTM Put (lower than market price)
BTO 1 QQQ 24JUN WEEKLY 295.00 PUTS OTM Put (protection against negative price action)
BTO: Buy to Open
STO: Sell to Open
Let’s say we sell a call with a $305 strike and receive a $6.50 credit. Next, we buy a call with a strike of $310 at cost of $4.30. The premium that we will walk away with will be $2.20 ($6.50 - $4.30) per contract.
Going on to the second part of the trade, we will sell a put with a strike of $300, which will give us $8.20 credit. Next, we will purchase a put with a strike of $295 at cost of $6.49. The premium that we will walk away with will be $1.71 ($8.20 - $6.49) per contract.
Max Profit and Max Loss
The total net credit for this position per contract will be $3.91. Note that in order to keep the Max Profit received when opening the trade, we need for all the options contracts to expire worthless. This means that we need the price of QQQ to stay between $305 and $300.
On the other hand, Max Loss will occur in either of the following cases. Let’s say in scenario 1 that QQQ closes at $315 above upper call strike ($310) and in scenario 2 ) QQQ closes at $290 below the lower put strike ($295) at expiration.
Scenario 1: The sold call is losing $10 ($305-$315) while the purchased call profited $5 ($315-$310). The total loss when adding these together is $5 per contract. Now, we take the value of $5 and subtract the initial credit of $3.91. This will give us the total loss of $1.09 per contact purchased.
Scenario 2: The sold put is losing $10 ($290 -$300) while the purchased put profited $5 ($295-$290). The total loss when adding these together is $5 per contract. Now, we take the value of $5 and subtract the initial credit of 3.91. This will give us the total loss of $1.09 per contact purchased.
Risk Management & Strategy
Position size: 3 - 5% of your total account value
Be ok with not being able to take every trade that does not make sense
If entering more than 1 contract, exiting a portion of the position as the trade develops (in this case with time getting closer to exp) is a great way to reduce loss and secure profit.
Have a predetermined set amount you are willing to lose and gain (OCO order is a great way to take emotion out of trading)
Practice executing this trade in a simulator prior to attempting in live account
Pro tip: knowing where there could be support and resistance will help set realistic profit and loss goals.