long iron condor

long Iron Condor

Post By - Laxmi Mahera
Review By : Rohan Sharma
Updated on : October 25, 2021

Basics Concepts – Long Iron Condor

Description - Long Iron Condor

The Long Iron Condor is an intermediate strategy that can be profitable for stocks that are range bound.
A variation of the Long Iron Butterfly, it is in fact the combination of a Bull Put Spread and a Bear Call Spread.
The higher strike put is lower than the lower strike call in order to create the condor shape.
The combination of two income strategies also makes this an income strategy.
Long Iron Condor, first trading a Bull Put Spread just below support and then as the stock rebounds off resistance adding a Bear Call Spread, thereby creating the Long Iron Condor.

Buy one lower strike (OTM) put.
Sell one lower middle strike (OTM) put.
Sell one higher middle strike (OTM) call.
Buy one higher strike (OTM) call. All options share the same expiration date
for this strategy.
All options share the same expiration date for this strategy.
For this strategy, you must use both calls and puts. A Long Iron Condor is the combination of a Bull Put Spread and a Bear Call Spread.
The short put strike is lower than the short call strike.
Remember that there should be equal distance between each strike price, while the stock price should generally be between the two middle strikes.

Context - Long Iron Condor

Outlook

With Long Iron Condors, your outlook is direction neutral. You expect little movement in the stock price.

Net Position

This is a net credit trade.
Your maximum risk is the difference between any two strikes less your net credit.
Remember that the all the different strike prices are equidistant to each other.
Your maximum reward is the net credit you receive.

Effect of Time Decay

Time decay is helpful to this position when it is profitable and harmful when the position is unprofitable.
When you enter the trade, typically the stock price will be in the profitable area of the risk profile, so from that perspective, time decay harms the position.

Time Period to Trade

It’s safest to trade this strategy on a short-term basis, preferably with one month or less to expiration.

Breakeven Down = (Middle short put strike – net credit)

Breakeven Up = (Middle short call strike + net credit)

Steps to Trading a Long Iron Condor

Steps In

Try to ensure that the trend is range bound and identify clear areas of support and resistance.

Steps Out

Manage your position according to the rules defined in your Trading Plan.
Remember the Long Iron Condor is a combination of other strategies, so it can be unraveled in two-leg chunks.
You can unravel the position just before expiration—remember to include all the commissions in your calculations.

Exiting the trade - Long Iron Condor

Exiting the Position

With this strategy, you can simply unravel the spread by buying back the options you sold and selling the options you bought in the first place.

Mitigating a Loss

Advanced traders may leg up and down or only partially unravel the spread as the underlying asset fluctuates up and down.
The trader will be taking smaller incremental profits before the expiration of the trade.

Advantages and Disadvantages

Advantages

Profit from a range bound stock for no cost and low downside risk.
Capped and low risk compared with potential reward.
Comparatively high profit potential if the stock remains range bound.

Disadvantages

The higher profit potential comes with a narrower range between the wing strikes.
The higher profit potential only comes nearer expiration.
Bid/Ask Spread can adversely affect the quality of the trade.

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