An iron condor is executed by simultaneously selling an out-of-the-money put spread and an out-of-the-money call spread. Both spreads generally have the same width and they are roughly equidistant from the current stock price, although, as with all spreads and combinations, if changing a strike price results in a more logical trade or a trade that makes more sense given an important level on the stock chart, then don't feel bound by the traditional definitions. In this case, we execute an iron condor by selling the 410/440 put spread and simultaneously selling the 470/500 call spread. An iron condor is a limited risk, nondirectional trade that we'd execute when we expected little volatility. The goal is to have both vertical spreads expire worthless. What does this payoff chart look like? We see that in Figure 12.9.
The condor that resulted in the nearly identical payoff as this iron condor was a long condor so this iron condor is considered a “long” iron condor even though we're selling both spreads.
Observant readers will notice that our resulting option position is short one option strangle and long another wider option strangle that serves to define the risk. We sold the 440/470 strangle by simultaneously selling the 440 put at 8.65 and the 470 call at 7.93 to collect a total of 16.58. That 16.58 would be ours to keep, but we'd have unlimited risk so we simultaneously bought the 410/500 strangle by buying the 410 put at 2.20 and the 500 call at 2.28. That strangle cost 4.48 but again, it defines our risk. This “strangle spread” generates a net of 12.10 (16.58 — 4.48) in premium. That 12.10 is the maximum profit. The maximum potential loss is 17.90. The maximum potential profit and maximum potential loss are identical to the
FIGURE 12.9 A 410/440/470/500 Iron Condor in AAPL
potential outcomes for our iron condor because the two trades are identical. Once you start to see these symmetries in your option positions, you'll understand the best way to make adjusting trades, and you'll be on your way to being a real option trader, not just an investor who uses options.