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March 26 2016


iron condor

The iron condor credit spread strategy is used by stock market traders if they feel that a stock will trade sideways for a specific amount of time. Perhaps they expect small fluctuations up and down in the underlying stock price, however over another 30 days price action will remain relatively unchanged. When this is the case, equity option trades can take advantage of what is called time decay, or positive theta. What theta represents is the decay in the worth of an out-of-the-money option as its expiration date approaches. The iron condor setup is just the combination of a bull put spread and a bear call spread. stock options trading

This trade is set up by selling out-of-the-money options and purchasing further out-of-the-money-options. Once structured, the trade will get a net credit since the sold options make a greater premium than the expense of the purchased options. As time decay continues to wear at the worth of all options, the trade could possibly become profitable. However, sharp moves by the underlying stock to the upside or downside may cause the career becoming a loss. The further from the money the purchased options are, the more the risk versus reward setup will increase. Simply, the more risk you take on for the trade, the more credit you are able to potentially receive at expiration. options market

We will now set up a good example of an iron condor trade and just how to implement one. Let's claim that Apple (AAPL) is trading at $620 per share with 41 days to go until expiration. We believe that it is highly probable that the stock is going to be trading between $580 and $640 at expiration. When we begin with the bull put spread, we'd want to buy the 580 put strike choice for $4.40 and sell the 590 put strike choice for $6.00. Thus giving us a net credit of $1.60. Next, we'd complete the iron condor position by creating a bear call spread. To get this done, we'd buy the 660 call strike choice for $4.25 and sell the 650 call strike choice for $6.20. This could give us a net credit of $1.95.

To calculate our overall risk and reward, we'd simply accumulate our total credits from each spread, gives us $3.55. To calculate our risk for the trade, we'd subtract the credit received from the sum total difference in strike prices. Inside our example would subtract $3.55 from $10.00, gives us a complete of $6.45 of risk. Therefore, we can calculate this trade offers the potential to create $3.55 for every single $6.45 we risk. Since one option contract represents 100 shares of the underlying stock, we have the ability to profit $355 at expiration while risking $645. Therefore, if Apple stock is trading between $590 and $650 per share at expiration this trade is going to be fully profitable.

The condor strategies are great to work with in markets that aren't experiencing a lot of volatility and neither the bulls nor the bears have a dominant stranglehold on the market. It is highly suggested never to execute an iron condor on a stock when earnings will occur within the period of time of the trade being open. Earnings are one of many single biggest drivers of stock price movements. Always make sure you check for upcoming earnings on the company you're considering opening this trade on. Also, make sure you identify clear quantities of support and resistance, as these could help identify high probability areas with which to setup your iron condor. Identifying the correct times to open this sort of trade allows a trade to profit when a stock is trending sideways. Because that is so the case with markets, being able to properly execute the iron condor strategy is imperative to being truly a successful options trader.

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