Good example of a condon options

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As Hal: good example of a condon options

A "condor" in options trading refers to the Iron Condor strategy. The Iron Condor is a neutral strategy and is created by combining a Bull Put Spread and a Bear Call Spread. Here’s a step-by-step example:


Iron Condor Example:

Let's assume stock XYZ is trading at $100.

1. Sell 1 out-of-the-money (OTM) Put Option:

Strike Price: $95

Premium received: $2

 Buy 1 further OTM Put Option (for protection):

Strike Price: $90

Premium paid: $1

This combination creates a Bull Put Spread.

3. Sell 1 OTM Call Option:

Strike Price: $105

Premium received: $2

4. Buy 1 further OTM Call Option (for protection):

Strike Price: $110

Premium paid: $1

This combination creates a Bear Call Spread.


Net Premium Received:

= (Premium from sold put + Premium from sold call) - (Premium for bought put + Premium for bought call)

= ($2 + $2) - ($1 + $1)

= $4 - $2

= $2


Maximum Profit:

The net premium received = $2 (per share or $200 for standard options contract of 100 shares).


Maximum Loss:

The difference between the strikes of one of the spreads minus the net premium received. In this example, it's either the difference between the call strikes or the put strikes (whichever is smaller, though in this example they're the same).

= ($105 - $100 or $95 - $90) - $2

= $5 - $2

= $3 (per share or $300 for standard options contract of 100 shares).


Break-even Points:


Lower break-even = Lower strike of Bull Put Spread + Net premium received = $95 + $2 = $97.

Upper break-even = Higher strike of Bear Call Spread - Net premium received = $105 - $2 = $103.

Ideal Scenario for Maximum Profit:

You want the stock to stay between your two short strikes ($95 and $105) so that all options expire worthless. If the stock is between these prices at expiration, you keep the $2 premium.


Risk Management:

Your risk is defined and limited to the difference between one set of strike prices minus the net premium received. This is why many traders find this strategy attractive.

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