Iron Condor - Index Example

The Index Strategy Workshop is designed to assist individuals in learning about various index option strategies. These discussions and materials are for educational purposes only and are not intended to provide investment advice. For the sake of simplicity, taxes, commissions and other trading costs have been omitted from the discussions and strategies. These should be taken into account when making investment decisions. These strategies are based on hypothetical situations involving a European-style, cash-settled index and should only be considered as examples of potential trading approaches.

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 index trading at $145 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 index. This trader enters a Condor spread by choosing the following options:

Buy one October 135 Call at $11.00
Sell one October 140 Call at $7.00
Sell one October 150 Call at $2.00
Buy one October 155 Call at $1.00
Net debit equals $3.00

Consider the three possible scenarios at expiration:

Index at $135 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.

Index at $155 or Higher
The long October 155 call expires worthless but the long October 135 call is now worth $20. The short October 140 call is now worth $15 and the short October 150 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 $140 and $150
The long October 135 call is now in-the-money. The short October 140 call is also in-the-money. The October 150 and 155 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 index 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.