14. Iron Condor

A Short Put Spread put together with a Short Call Spread

Separate Charts

This is a very similar position to aStrangle, in fact it is the same position with an added long put on the down side and a long call on the upside to limit your losses, this will have less max profit than the strangle but you do not have the unlimited loss risk

Advantages

This position is profitable if the underlying stays inside a range
Also profitable if the IV decreases after establishing the position, but because you are hedging your profits are less than the Strange
Time decays works in favor of this position, because your betting on something not happening (less than strangle)
Max profit happens only at expiration with both options expiring worthless
It could be stablished as a delta neutral strategy initially
- For example the short put may give you 20 deltas and the short call may give you -20 deltas, so they offset and you have no delta

Disadvantages

The bid/ask spread slippage may be high, because you are initiating 4 positions, adding the 4 spreads leads to higher slippage
Higher IV leads to reduced profits (because there is a greater probability of the underlying to go outside the range)

Analysis

The longs are more OTM than the shorts (because its a combination of short spreads)
The max profit is the credit you recieve minus the premiums of the options (it is better to see the max profit visually rather than using the formula)
The break-evens are the strike prices of your shorts plus/minus the max profit (the credit you receive, minus what you pay for the longs)

Example

This example will use the same values as the Strangle to visualize differences
Underlying at 100
The 80 put is at 1.50
The 86 put is at 3.50
The 110 call is at 3.50
The 120 call is at 1.50
We buy the 80 put for 1.5 and sell the 90 put for 3.5, we get 2
We buy the 120 call for 1.5 and sell the 110 call for 3.5, we get 2
Max profit is $4
So it is an 90/80 short put spread and a 110/120 short call spread
This position is referred to an 80/90 - 110/120 Iron Condor for $4
Max loss is the grater spread of the strike prices, in this example the losses would be both $6 ( loss of 90 - 80 - Credit or loss of 120 - 110 - Credit)