When you expect the price of the underlying asset to fluctuate greatly for some time to come, but you don't know if it will rise or fall, you can buy a Long Iron Condor.

How to build

● Sell 1 copy of Call1

● Buy 1 copy of Call2

● Buy 1 copy of put1

● Sell 1 copy of put2

The underlying assets, quantity, and expiration dates for Call1, Call2, Put1, and Put2 are all the same. The differences are as follows:

Exercise price: call1>call2>put1>put2, and call1-call2=put1-put2;

Strategy brief

The Long Iron Condor strategy is an options strategy with limited return and risk.

When the stock price is above the high break-even point or less than the low break-even point, the strategy yields positive returns.

When the price of the underlying asset fluctuates between a high break-even point and a low break-even point, the strategy makes a loss, but the loss is limited.

The Long Iron Condor strategy is a four-legged strategy, so it also has two major characteristics of a multi-legged strategy:

First, transaction costs are relatively high, so you need to pay attention to processing fees.

Second, after establishing a strategy, it is possible to split legs flexibly according to the actual trend of the underlying asset.

First, if you separate the trading call and trade put parts, this strategy is actually a combination of a bullish bullish option spread and a bearish bearish option spread.

Furthermore, if you only look at the middle part of this strategy, it is actually a purchase of a wide span combination, plus a transaction where both ends sell options, which actually reduces the cost of holding a wide span combination. At the same time, this strategy also limits the room for maximum profit.

However, if you only look at the two end of the transaction to sell options, you will also find that this is a broad-span strategy. Coupled with options trading bought in the middle, it limits the risk of both ends selling options. At the same time, the cost of the strategy has also increased.

Finally, looking at the break-even chart, it can also be seen that this strategy is similar to the selling hawk-style spread strategy. The differences are:

First, hawk-style spreads can only be constructed using one type of option (call or put).

Second, the strategy of selling hawk-style put options usually has positive cash flow at the beginning of opening a position, while the cash flow is often negative when opening a position with an Long Iron Condor.

This difference makes the two strategies take different risks and respond differently when faced with different situations during the trading process.

Risks and benefits

● Break-even point

Low break-even point: stock price = buy put exercise price - net option premium

High break-even point: stock price = buy call exercise price+net option premium

● Maximum profit

Maximum return = distance between exercise price between the two terminals+net option premium

● Maximum loss

Net option premium

Examples of calculations

Assuming that in the US stock market, TUTU's current stock price is 52 US dollars. You expect the asset price to fluctuate greatly in the future, but you are unsure whether it will rise or fall sharply, so you have constructed a Long Iron Condor strategy:

Sell 1 call at a price of 2 US dollars with an exercise price of 56 US dollars;

Buy 1 call with an exercise price of 52 US dollars at a price of 3 US dollars;

Buy 1 put with an exercise price of 48 US dollars at a price of 2 US dollars;

Sell 1 put with an exercise price of $44 at the price of $1.

At maturity, your earnings will be as follows:

Explanation:

1. The article uses stocks as option targets to explain strategies. The actual investment bid can also be stock indices, futures contracts, bonds, currencies, etc.;

2. Unless otherwise specified, all options in this article refer to on-market options;

3. The TUTU company in the article is a virtual company;

4. The relevant calculations in this article do not take into account handling fees. In actual options investment, investors need to consider transaction costs.