The Long Iron Condor position is the combination of a short call spread and a short put spread in the same underlying.
It’s a strategy that’s a very high probability trade, allowing for a modest profit with enough room for error.
Also, it’s meant to be a directionally neutral trade, used when volatility is elevated in relation to its forecasted range. It’s my favorite volatility selling strategy. By selling a call spread and a put spread, you gain extra short volatility and extra decay, while at the same time limiting your risk.
Over the past two days, we looked at selling a call spread and a put spread.
Here’s the hypothetical call spread:
Stock XYZ is trading at 90. You’d theoretically sell the 100/105 bear call spread for $1. To execute this trade, you would:
Sell the 100 calls
Buy the 105 calls
For a total credit of $1.
Here is the graph of this trade at expiration.
Here’s the hypothetical put spread:
Stock XYZ is trading at 90. You’d sell the 85/80 put spread for $1. To execute this trade you would:
Sell the 85 Puts
Buy the 80 Puts
For a total credit of $1.
Here is the graph of this trade at expiration:
Now we will combine these two spreads to make a Long Iron Condor:
To do this, you simultaneously:
Sell the 100 calls
Buy the 105 calls
For a total credit of $1,
And
Sell the 85 Puts
Buy the 80 Puts
For a total credit of $1.
This would give you a total credit of $2.
Here is the graph of this trade at expiration:
As you can see in the chart, at expiration, you’d make $2 as long as the stock stays between 85 and 100. Meanwhile, your downside is limited to $3 if the stock goes lower than 80 or higher than 105.
This is my favorite strategy to use in stocks with elevated volatility because you have more short volatility, more decay to collect and you have less dollars at risk.
In my mind, this is the safest way to sell volatility at earnings, and we will use this strategy quite a bit in volatile names such as Apple, Tesla and Priceline.
If you have any questions about any of these strategies, please do not hesitate to email me at jacob@cabot.net.