Iron Condor – A Modified Trade?
An options iron condor spread is actually not a unique strategy in and of itself.
It works like a butterfly spread but has 2 short legs separate in 2 different option strikes.
For example, if one would trade a butterfly on EBAY $21, it could be constructed as follow:
- Buy 1 EBAY Jun10 19 Call
- Sell 2 EBAY Jun 10 21 Call
- Buy 1 EBAY Jun 10 23 Call
Above butterfly as 2 short legs on the same strike but a condor on this stock would be modified into as below:
- Buy 1 EBAY Jun10 19 Call
- Sell 1 EBAY Jun10 20 Call
- Sell 1 EBAY Jun10 22 Call
- Buy 1 EBAY Jun10 23 Call
Now a condor has 4 legs that effectively widen the profit range. However, it at the same time increases your risk and lower your potential profit. The wider the short legs are, the more risk and less profit you have. The upside of this is it increases your probability of winning.
Depending on which broker you are dealing with, condor and butterfly could cost you a lot more in commission because of more legs.
If you look closely, a traditional condor is made up of all calls or all puts. This means at the point of expiration, if stock lands in between short legs, you have to buy and sell your options to close the position.
So, in order to take advantage of the ability of rolling options into expiration, we modified the condor as follow:
- Buy 1 EBAY Jun10 19 Put
- Sell 1 EBAY Jun10 20 Put
- Sell 1 EBAY Jun10 22 Call
- Buy 1 EBAY Jun10 23 Call
Now, this condor looks as if 2 OTM credit spreads combined. If stock landed at say $21 by the third Friday of the month, this condor will expire worthless
The Long 19 Put and Short 20 put will be OTM then and go to heaven. Other pair will do the same thing and you get to keep the money plus paying zero (0) commission.
That is called an Iron Condor. Sound tough huh 
Category: Iron Condor
