Lesson

Iron condor range plan | Options Educator

Sell a defined range and manage short volatility risk.

What you'll practice

  • Move both short strikes outside one standard move: the short put below $91.22 and the short call above $108.78.
  • Predict: after "Both wings $5 further out", what happens to the most the condor can lose?
  • Predict: on the day you open it, after "Implied volatility up 10 points" with the stock unchanged, what happens to the condor's profit or loss today?

In this lesson

Iron Condor Foundations

  • An iron condor sells a put spread below the stock and a call spread above it, in one expiration, and collects a credit
  • In the example the credit is $0.37 + $0.43 = $0.80 a share, and that is the most you can make
  • The most you can lose is $5.00 − $0.80 = $4.20 a share, and the break-evens are $89.20 and $110.80

Placing the Strikes and Reading the Credit

  • One standard deviation here is $100 × 0.25 × √(45 / 365) = $8.78, so the $90 and $110 short strikes sit just outside the typical range
  • Wider wings raise credit and risk together: $10 wings pay $1.04 against a maximum loss of $8.96
  • A condor is short volatility: its buy-back price is $0.80 at 25% implied volatility and $1.55 at 35%

Managing the Condor

  • Sell condors when implied volatility is high compared with what you expect the stock to deliver and no catalyst is due before expiration
  • Take profit near half the credit: with 25 days left and the stock at $100 the condor is worth $0.31, so closing earns $0.49, 61% of the credit
  • Decide the exit before opening: at $109 with 15 days left and implied volatility at 30%, closing loses $0.68, 16% of the $4.20 maximum loss

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