An iron condor is a low-risk, directional neutral options strategy comprising bull put spread and bear call spread.
A bull put spread as a strategy involves buying a put option and selling a put option at different strike prices. The strike price is the predetermined price in options trading at which the underlying stock can be bought or sold.
At the same time, bear call spread is a strategy that involves selling a call with a lower strike price and buying a call with a higher strike price subsequently.
The bull put spread targets lower strike prices, while the bear call spread targets higher strike prices. Considering a trader sells options at a higher price than the options they buy, the result of the transaction is a net credit to their account.
In case the underlying stock fails to move much, then all the options expire worthless. The trader keeps the money they earned from the iron condor.
The cash credited to the account when a trader opens the trade is their maximum profit. Essentially, a trader can establish a profit zone or range that the underlying securities must stay within to make a gain by combining these two credit spreads.
In case the underlying security remains within this profit range, the iron condor strategy can result in making gains. However, if the underlying security moves outside this particular range, the strategy will lead to a loss.
A trader should suitably use an iron condor option when they think the underlying asset has low volatility. However, staying away from volatile stocks with an iron condor option trade is suitably advised.
This is because the ideal situation in an iron condor is that the stock trades at about the same point it was when a trader opened the position. That’s how all the options expire worthless, and a trader keeps their credit.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.