You can think of this strategy as simultaneously running an out-of-the-money short put spread and an out-of-the-money short call spread. Some investors consider this to be a more attractive strategy than a long condor spread with calls or with puts because you receive a net credit into your account right off the bat.
Typically, the stock will be halfway between strike B and strike C when you construct your spread. If the stock is not in the center at initiation, the strategy will be either bullish or bearish.
The distance between strikes A and B is usually the same as the distance between strikes C and D. However, the distance between strikes B and C may vary to give you a wider sweet spot.
You want the stock price to end up somewhere between strike B and strike C at expiration. An iron condor spread has a wider sweet spot than an iron butterfly spread. But (as always) there’s a tradeoff. In this case, your potential profit is usually lower.
Maximum Potential Profit
Profit is limited to the net credit received.
Maximum Potential Loss
Risk is limited to strike B minus strike A, minus the net credit received.
Break-even at Expiration
There are two break-even points:
- Strike B minus the net credit received.
- Strike C plus the net credit received.
TradeKing Margin Requirements
Margin requirement is the short call spread requirement or short put spread requirement (whichever is greater).
NOTE: The net credit received from establishing the iron condor may be applied to the initial margin requirement.
Keep in mind this requirement is on a per-unit basis. So don’t forget to multiply by the total number of units when you’re doing the math.
As Time Goes By
For this strategy, time decay is your friend. You want all four options to expire worthless.
After the strategy is established, the effect of implied volatility depends on where the stock is relative to your strike prices.
If the stock is near or between strikes B and C, you want volatility to decrease. This will decrease the value of all of the options, and ideally, you’d like the iron condor to expire worthless. In addition, you want the stock price to remain stable, and a decrease in implied volatility suggests that may be the case.
If the stock price is approaching or outside strike A or D, in general you want volatility to increase. An increase in volatility will increase the value of the option you own at the near-the-money strike, while having less effect on the short options at strikes B and C. So the overall value of the iron confor will decrease, making it less expensive to close your position.