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neutral strategies

Iron Condors

Analyzing the risk profile of iron condors
You sold an iron condor with $5-wide wings for $1.65. What is the most you can lose on this trade?
$1.65
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$4.35
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$5.00
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$3.35
Correct! To calculate max loss, simply subtract the credit from the width of the widest wing. In this case, both wings are $5 wide, so the max loss is $5 - $1.65 = $3.35
You sell a 35/45 put vertical against a 60/70 short call vertical. What is your max profit zone?
$35-$70
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$45-$60
Correct! Since both verticals are short, we can deduce that the 45 put and the 60 call are short options. We also know that two opposing credit spreads creates an iron condor. The max profit zone of an iron condor lies between the two short strikes. In this case, that zone happens to be between $45 and $60.
$45-$70
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Not enough information to tell
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You sold the 30/35/40/45 iron condor. Which strikes are the short strikes?
30, 35
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35, 40
Correct! The two center strikes of an iron condor are the always short. The two outer strikes are long.
40, 45
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30, 45
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XYZ is trading for $37. You sold the 30/35/40/50 iron condor for $1.95. Do you have greater risk to the upside or the downside?
The upside
Correct! Your call spread is $10 wide (40-50), while your put spread is only $5 wide (30-35). Your maximum loss to the upside is $10 - $1.95 = $8.05. Your max loss to the downside would only be $5 - $1.95 = $3.05.
The downside
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The risk is the same on both sides
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Not enough info to tell
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You sold a 30/35/40/45 iron condor, and the share price is currently $42.50. How much intrinsic value does your iron condor have?
$5.00
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$2.50
Correct! Your short 40 call is ITM, which means it has taken on intrinsic value: $42.50 - $40 = $2.50.
$42.50
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$45.00
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Which scenario would most likely benefit the P/L of your iron condor?
The put spread of your iron condor moves ITM
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The share price has rallied 20% in two days
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Options prices rise due to increased implied volatility
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Option prices are declining due to approaching expiration
Correct! To calculate max loss, simply subtract the credit from the width of the widest wing. In this case, both wings are $5 wide, so the max loss is $5 - $1.65 = $3.35
You sold an iron condor for $2.00. Which of these strike selections would give you the largest profit potential?
20/21/22/23
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10/15/20/25
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100/110/120/130
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All of the above
Correct! Remember, the most you can make on an iron condor is the credit you receive. In each case the most you could make is $2.00. Your max loss, on the other hand, WOULD vary based on strike selection.
You sell the 30/35/40/45 iron condor for $1.50. What are your break-evens?
$33.50, $41.50
Correct! To calculate your lower break-even, subtract the credit from the short put strike (35):
$35 - $1.50 = $33.50
To calculate your upper break-even, add the credit to the short call strike (40):
$40 + $1.50 = $41.50
$35.00, $40.00
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$30.00, $45.00
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$31.50, $43.50
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XYZ is trading for $35. Which of these iron condors would be most bullish?
25/30/35/40
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25/30/40/45
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33/34/36/47
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30/35/40/45
Correct! This scenario would give XYZ the most room to the upside, and the most risk to the downside. It would need XYZ to move higher in order to achieve max profit potential. Each of the other scenarios are either neutral or bearish.
What are one of the major risks of trading iron condors?
Decaying option value
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Unlimited loss potential
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Illiquidity
Correct! Illiquid markets are particularly challenging when trading iron condors. Trading four legs at once often exacerbates wide markets making it difficult to fill trades at favorable prices.
Limited profitability
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