Iron Condor

An iron condor strategy is basically a combo of two vertical spreads. It is purchasing or selling simultaneously a bull call spread and a bear put spread or a bull put spread and and bear call spread. In a bull call spread, you are anticipating the price to go up so the price must exceed a certain strike. In a bear put spread, you are anticipating the price to go down so the price must exceed a certain strike. What happens when you combine the two spreads is you want the stock to go in either direction to exceed the strike price being sold in either direction. In a bull put spread, you are anticipating the price to go up so the price must NOT exceed a certain strike. In a bear call spread, you are anticipating the price to go down so the price must NOT exceed a certain strike. What happens when you combine the two spreads is you DON’T want the stock to go in either direction and to NOT exceed the strike price being sold in either direction.

The two iron condors are the debit iron condor (combo of a bull call spread and a bear put spread) and the credit iron condor (combo of a bull put spread and a bear call spread). When you buy (debit) an iron condor, you are anticipating that a stock price will move in either direction. This is a bullish or bearish strategy. When you sell (credit) an iron condor, you are anticipating that a stock price will NOT move in either direction. You are looking for the stock to remain in a defined range. This is a completely neutral strategy. Lets look at an example of each.

The Debit Iron Condor

This strategy is most popular for trading stocks that report earnings that historically move the stock in a strong direction. With this strategy, you have determined from your charts that a price can go either way. You are determining that a stock price has a likelihood to exceed a certain price in either direction. We will use Netflix as an example. Netflix is at 624.06 (5/30/15). You are unsure which way the price may go. The debit iron condor consists of two vertical spreads. It is both the bull call spread and the bear put spread used together. Both of these strategies are used when you want a price to exceed a certain option strike. You can choose a 625/627.5 bull call spread because if the price breaks upward, you want it to exceed 627.5. You can choose a 622.5/620 bear put spread because if the price breaks downward, you want it to exceed 620. Combining them both into one strategy creates the debit iron condor. Now you want the price to exceed either the 620 or the 627.5 strike price in order to profit. The loss occurs if the price stays in between the strikes being sold (620 and 627.5) in the strategy.

The Credit Iron Condor

This strategy is most popular for trading stocks that are historically range bound. With this strategy, you have determined from your charts that a price will remain within a range. You are determining that a stock price has a likelihood to NOT exceed a certain price in either direction. We will use Netflix as an example. Netflix is at 624.06 (5/30/15). You believe the price will remain in a certain range. The credit iron condor consists of two vertical spreads. It is both the bull put spread and the bear call spread used together. Both of these strategies are used when you want a price to NOT exceed a certain option strike. You can choose a 620/617.5 bull put spread because you want the price to NOT exceed 620. You can choose a 630/632.5 bear call spread because you want the price to NOT exceed 630. Combining them both into one strategy creates the credit iron condor. Now you DON’T want the price to exceed either the 630 or the 620 strike price in order to profit. The loss occurs if the price moves beyond the strikes being sold (620 and 630) in the strategy.

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