I am new into options, have made zero real trades yet. I feel I need to really understand what is happening. (Good idea)
Here is an example: stock is at 289 current price and I place this iron condor (see table below)
Action Shares Strike Last ±
Buy 20 340 0.50 1,000
Sell 20 330 1.05 2,100
Net 1,100 net
Sell 20 250 1.75 3,500
Buy 20 240 1.05 2,100
Net 1,400 net
Net return 12.5%
What I still do not understand is what actually happens at 245, 235, 335, 345 if I do nothing and then how to exit the strategies to avoid and minimize loss Please explain.
Hello Dr. S,
A piece of advice. Do not speak of this trade as net + $2,500. Instead refer to the position per iron condor spread.
Thus, you "traded 20 iron condors, at a credit of $1.25 each."
1) The potential return is 12.5%. It has not been earned yet.
2) If you do NOTHING and wait for the options to expire, then:
At 245, The put you own is worthless, the calls are worthless and the puts you sold are worth $500 each.
Assuming you do not want to be assigned (and own 2,000 shares), you pay $500 each, or $10,000 to close the
position. Net LOSS: $7,500. Or, in the terminology I prefer, you close 20 iron condors, paying $500 for each.
That's a net loss of $375 per spread.
At 235 (or lower) you have the maximum possible loss. You exercise your 235 puts (because these puts are not in
the money, you must tell your broker to exercise them) and you are assigned on your short puts. The cost is $1,000
per put spread, resulting in a loss of $875 each, or $17,500.
At 335, your loss is $375 per spread. Your call is worthless, the other is worth $500.
At 340 (or higher), you lose the maximim, or $875 per spread (iron condor).
3) If and when you decide the risk of holding the position makes you uncomfortable, it's time
to close the position or otherwise reduce the risk. You do that by entering two spread orders: one to
close the call spread and another to close the put spread.
If You require additional details, write again.
Mark D. Wolfinger
The Rookie's Guide to Options:
The Beginner's Handbook of Trading Equity Options