Iron Condor Option Strategy.

Iron Condor Option Strategy.


The iron condor is a limited risk, non-directional option trading strategy that is designed to have a large probability of earning a small limited profit when the underlying security is perceived to have low volatility. The iron condor strategy can also be visualized as a combination of a bull put spread and a bear call spread

Sell 1 OTM Put
Buy 1 OTM Put (Lower Strike)
Sell 1 OTM Call
Buy 1 OTM Call (Higher Strike)

Using options expiring on the same expiration month, the option trader creates an iron condor by selling a lower strike out-of-the-money put, buying an even lower strike out-of-the-money put, selling a higher strike out-of-the-money call and buying another even higher strike out-of-the-money call. This results in a net credit to put on the trade.

Maximum Profit is the Net Credit received while executing the Iron Condor. The Maximum loss under the strategy is also limited once the range is broken. Though the success rate of strategy is significantly higher, the only drawback is that the Maximum Loss under the strategy may be significantly higher than the Maximum Gain.

The Strategic Payoff of the Strategy would be like as follow

The following example of Iron Condor of Nifty would better clear the concept.

Underlying : Nifty

CMP : 8130 (Spot)

View : Range bound 7800-8400

So now our view on Nifty is that it won't go beyond 8400 and at the same time it won't fall below 7800 mark. So we can initiate Iron Condor as follow

Sell 8400 CE @ 43 so net premium received = Rs. 1075 (43*25)

Buy 8500 CE @ 25 so net premium outflow = Rs.625 (25*25)

Sell 7800 PE @ 36 so net premium received = Rs.900 (36*25)

Buy 7700 PE @ 22 so net premium outflow = Rs. 550 (22*25)

So Net credit is Rs.800 (1075-625 +900-550)  which is our Maximum Profit

Maximum Loss Above 8400 & Below 7800 is Rs.1700  (2500 - 800)