Iron Condor - Equity Example

The Equity Strategy Workshop is a collection of discussion pieces followed by interactive worksheets. The workshop is designed to assist individuals in learning how options work and in understanding various options strategies. These discussions and materials are for educational purposes only and are not intended to provide investment advice.

Investment decisions should not be made based upon worksheet outcomes.

Access to, or delivery of a copy of, the Options Disclosure Document must accompany this worksheet.

Example

Please note: Commission, dividends, margins, taxes and other transaction charges have not been included in the following examples. However, these costs can have a significant effect on expected returns and should be considered. Because of the importance of tax considerations to all options transactions, the investor considering options should consult with his/her tax advisor as to how taxes affect the outcome of contemplated options transactions.

XYZ is trading at $45 in September. An options trader wants to implement a limited risk, non-directional trading strategy on XYZ which is viewed as being a low volatility type stock. This trader enters a Condor spread by choosing the following options:

Buy one October 35 Call at $11.00
Sell one October 40 Call at $7.00
Sell one October 50 Call at $2.00
Buy one October 55 Call at $1.00
Net debit equals $3.00

Consider the three possible scenarios at expiration:

Stock at $35 or Lower
All options will expire worthless and there will be a maximum loss of $3.00 ($300) which was the cost of the Condor spread.

Stock at $55 or Higher
The long October 55 call expires worthless but the long October 35 call is now worth $20. The short October 40 call is now worth $15 and the short October 50 call is worth $5. The long call profit and the short call losses off-set each other so we still have a loss of $3 ($300) which was the original net debit we paid to initiate the trade.

Stock Between $40 and $50
The long October 35 call is now in-the-money. The short October 40 call is also in-the-money. The October 50 and 55 calls expire worthless. We paid $3 to initiate the trade so our maximum profit was achieved at $2 ($200).

For those who are neutral on a particular stock over the near-term, and who require a known, limited risk and reward, the Long Condor Spread might be an appropriate strategy to use. Purchasing a Long Condor Spread one time can usually require a small initial cash investment to achieve a profit if your neutral forecast proves correct.