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Iron condor

A strategy combining a bull spread on put options and a bear spread on call options on the same underlying with the same maturity at four different exercise prices. A long iron condor refers to the purchase of a put option with a lower exercise price and a call option with a higher exercise price, and to the simultaneous sale of another call option and another put option with intermediate exercise prices between the lower exercise price and the higher exercise price of the two purchased options. A short iron condor (or reverse iron condor) refers to the sale of a put option with a lower exercise price and a call option with a higher exercise price, and to the simultaneous purchase of another call option and another put option with intermediate exercise prices between the lower exercise price and the higher exercise price of the two options sold.

(1) In practice, in a long position, the options purchased are generally out of the money and the options sold slightly less out of the money. In a short position, the options sold are out of the money and the options purchased are slightly less out of the money. (2) Like the condor, this strategy is used in a long position to limit losses in the event of major instability in the price of the underlying. However, unlike the condor strategy, which is constructed using either call options or put options, the iron condor strategy combines both put options and call options. In addition, the trade results in a net inflow to the buyer and a net outflow to the seller. (3) The iron condor is similar to the iron butterfly, the difference being that the two options sold (or purchased, in a short position) have different exercise prices.

Translations

Synonyms and variations

  • Iron condor spread
  • Long iron condor
  • Reverse iron condor
  • Short iron condor

See also