Option Strategies Details

A trader who wants to speculate on a decrease in volatility and a neutral price can sell a Short Iron Condor. The trader receives a credit, called a premium, to sell both the Put Credit Spread and the Call Credit Spread.

Suppose stock XYZ is trading at $280. You forecast a decrease in volatility and a neutral XYZ price.

You sell a $260 / $265 / $295 / $300 Short Iron Condor (selling the $265 Put and buying the $260 Put, selling the $295 Call and buying the $300 Call) and receive a $1.80 credit to express this view. Your breakeven prices at expiry are $263.20, the short Put strike minus the credit received, and $296.80, the short Call strike plus the credit received. The max loss at expiry occurs if price is outside of the breakeven prices of $263.20 and $296.80 and is equal to the width of the spreads minus the credit received ($5 - $1.80 = $3.20 in this example). The max profit at expiry occurs if price is higher than $265 and lower than $295, but since the time component of your trade plan may not extend all the way to expiration you should be prepared to buy to close at a variety of XYZ prices as the market value of your $260 / $265 / $295 / $300 Short Iron Condor changes. The Short Iron Condor is a fixed-risk "version" of the Short Strangle because "buying the wings" (the $260 Put and the $300 Call) sets a max loss in case of an extreme price move outside of your profitable range.