Condor option trading
That will increase your probability of success. However, the further these strike prices are from the current stock price, the lower the potential profit will be from this strategy. As a general rule of thumb, you may wish to consider running this strategy approximately days from expiration to take advantage of accelerating time decay as expiration approaches.
Of course, this depends on the underlying stock and market conditions such as implied volatility. Some investors may wish to run this strategy using index options rather than options on individual stocks. Margin requirement is the short call spread requirement or short put spread requirement whichever is greater. 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.
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. 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.
Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options.
Options investors may lose the entire amount of their investment in a relatively short period of time. Multiple leg options strategies involve additional risks , and may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies. Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point.
The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that the forecasts of implied volatility or the Greeks will be correct. Ally Invest provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. System response and access times may vary due to market conditions, system performance, and other factors.
Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. The iron condor is an option trading strategy utilizing two vertical spreads — a put spread and a call spread with the same expiration and four different strikes.
A long iron condor is essentially selling both sides of the underlying instrument by simultaneously shorting the same number of calls and puts, then covering each position with the purchase of further out of the money call s and put s respectively. The converse produces a short iron condor. In keeping with this analogy, traders often refer to the inner options collectively as the "body" and the outer options as the "wings".
The word iron in the name of this position indicates that, like an iron butterfly , this position is constructed using both calls and puts, by combining a bull put spread with a bear call spread. The combination of these two credit spreads makes the long iron condor and the long iron butterfly a credit spread, despite the fact that it is "long.
Because the long, plain Condor and Butterfly combine a debit spread with a credit spread, that overall position is instead entered at a net debit though usually small. One of the practical advantages of an iron condor over a single vertical spread a put spread or call spread , is that the initial and maintenance margin requirements  for the iron condor are often the same as the margin requirements for a single vertical spread, yet the iron condor offers the profit potential of two net credit premiums instead of only one.
This can significantly improve the potential rate of return on capital risked when the trader doesn't expect the underlying instrument's spot price to change significantly. Another practical advantage of the iron condor is that if the spot price of the underlying is between the inner strikes towards the end of the option contract, the trader can avoid additional transaction charges by simply letting some or all of the options contracts expire.
The difference between the put contract strikes will generally be the same as the distance between the call contract strikes. Because the premium earned on the sales of the written contracts is greater than the premium paid on the purchased contracts, a long iron condor is typically a net credit transaction. This net credit represents the maximum profit potential for an iron condor. The potential loss of a long iron condor is the difference between the strikes on either the call spread or the put spread whichever is greater if it is not balanced multiplied by the contract size typically or shares of the underlying instrument , less the net credit received.
A trader who buys an iron condor speculates that the spot price of the underlying instrument will be between the short strikes when the options expire where the position is the most profitable. Thus, the iron condor is an options strategy considered when the trader has a neutral outlook for the market. The long iron condor is an effective strategy for capturing any perceived excessive volatility risk premium ,  which is the difference between the realized volatility of the underlying and the volatility implied by options prices.
Buying iron condors are popular with traders who seek regular income from their trading capital. An iron condor buyer will attempt to construct the trade so that the short strikes are close enough that the position will earn a desirable net credit, but wide enough apart so that it is likely that the spot price of the underlying will remain between the short strikes for the duration of the options contract.