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 Iron Condor : A first approach
Issued on August 26 2010 par Strategies-options.com
Iron Condor is one of the most appreciated strategy by the traders. They are moreover most widely spread to retail options traders.
Iron Condor is probably the strategy the most appreciated by option traders. Formerly the privilege of "Locals", option market makers on floors, it remains one of the most widely spread in the financial literature, in particular for private investors.
I - What is an Iron Condor? Iron Condor is a strategy which combines 4 options, which are in fact the sale of two vertical spreads: the sale of a call spread (cf: Call Spread: A First Approach) added to the sale of a put spread (cf: Put Spread: A First Approach). Both vertical spreads have the same strike spreads.They are generally sold otm, in a way that the underlying is at equal distance between the sold strikes. II - graphic Representation We can represent Iron Condor in 3 dimensions. With volatility set at 30%, 1 year to maturity and an interest rate of 5 % we have the following representation for Iron Condor 80/90 // 110/120:  III - The purpose By definition it is a credit strategy that means we cash some money in when done as usual. In the example this above, this Iron Condor gets a credit of 5.86 which is the maximum gain for a risk of 10 ( 90-80 or 120-110 ) hence a maximal loss of 10-5.86=4.14. The purpose is thus that underlying would stay between the strikes that are sold (between 90 and 110 in the previous example) and so to allow the investor to keep the net premiums which had been collected. IV - A moderate risk An asset can't be at two different levels at the same time. the risk is beforehand perfectly limited and known, and the maximum loss is limited. It is the main element from where comes the success of Iron Condor. Next : Iron Condor Previous : Calendar Spread : The Delta ∆ Download the pricer here Advanced Strategies - INDEX Advanced Strategies - CHAPTER I Advanced Strategies - CHAPTER II Advanced Strategies - CHAPTER III Advanced Strategies - CHAPTER IV Advanced Strategies - CHAPTER V Strategies-options.com |
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