Intermediate to advanced options strategy knowledge
Short Iron Condor
When you anticipate that the price of the underlying asset will not change much and the fluctuation will slow down for some time to come, you can use a Short Iron Condor.
How to build
● Buy 1 call 1
● Sell 1 copy of Call2
● Sell 1 copy of put1
● Buy 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:
Price: call1>call2>put1>put2
Strategy brief
The Short Iron Condor strategy is an options strategy with limited return and risk.
When the price of the underlying asset fluctuates between the high break-even point and the low break-even point, the strategy gains positive returns; when the stock price is greater than the high break-even point or less than the low break-even point, the strategy loses, but the loss is limited.
Short Iron Condor 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 bear call option spread and a bull market put option spread.
Second, if you only look at the middle part of this strategy, which actually sells a wide-span combination, plus a transaction that buys options at both ends, it actually limits the risk of selling a wide-span combination. At the same time, the maximum return is also reduced.
However, if you only look at the purchase transaction at both ends, you will also find that this is a broad buying strategy. Coupled with options trading sold in the middle, it reduces the cost of opening a position, and at the same time limits the maximum profit margin.
Finally, you can also look at the break-even chart. You can also find that this strategy is similar to buying an hawk spread. The differences are:
One is that hawk-style spreads can only be constructed using one type of option (call or put).
Second, the Short Iron Condor strategy usually has negative cash flow at the beginning of opening a position, while the cash flow is often positive when opening a position with a selling Iron Hawk spread. This difference makes these two strategies both take different risks and respond to different situations in the trading process.
Risks and benefits
● Break-even point
Low break-even point: stock price = selling option price - net option premium
High break-even point: stock price = selling call exercise price+net option premium
● Maximum profit
Net option premium
● Maximum loss
Maximum loss = exercise price interval between options of the same type (call or put) - net option premium
Examples of calculations
Assuming that in the US stock market, TUTU's current stock price is 52 US dollars. You don't expect the asset price to fluctuate much in the future, so you have created a Short Iron Condor strategy:
The purchase price is 56 US dollars for 1 call, and the price is 2 US dollars;
Sell 1 call for an exercise price of 52 US dollars, and the price is 3 US dollars;
Sell 1 put at an exercise price of 48 US dollars and the price is 2 US dollars;
The purchase price is 44 dollars for a put, and the price is 1 dollar.
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.