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Long Iron Condor

A Long Iron Condor is a multi-legged option strategy consisting of calls and puts. There are two long options (one call and one put) with a long call strike above a long put strike. There are two short options (one call and one put) with a short call option above a long call strike and a short put option below a long put strike. The interval between the call strikes should be equal to the interval between the put strikes. Expirations for each strike are the same. This trade results in a net premium paid (debit) upon initial order entry.

Long Iron Butterfly

Uses

The option trader who uses this strategy has a volatile outlook and expects the underlying security to close outside the short strikes at expiration.

Risks

This strategy is considered to have limited risk and limited reward. The maximum gain occurs when the stock price closes outside the short strike prices by expiration. Maximum loss is the initial debit taken. The maximum loss occurs when the underlying stock price at expiration is between the strikes of the long call and the long put.

Steady movement up (or down) causing the underlying stock to trade away from the middle strikes will result in an increase in strategy value.

Increasing implied volatility can have a positive impact on this strategy. Option traders electing to close the position before expiration could be impacted by decreasing implied volatility.

Time decay has a negative effect on this strategy.

Options traders have assignment and exercise risk on this trade. Early assignment (American Style) is a possibility when any of the short strikes are in-the-money. Also, the option trader runs the risk of uncertainty on assignment when the underlying security is close to one of the short outer strikes. This situation also results in the outer strikes still having some time premium on the last day of trading prior to expiration. The option trader should be aware of these risks prior to implementing this strategy.


Important Note: Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options.

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