Imagine a stock is currently trading at $50. An investor anticipates little price movement and wants to profit from this stability. They decide to implement an iron condor strategy to achieve this goal.
Here’s how the investor sets up this strategy:
1. Sell an In-the-Money Call: The investor sells a call option with a $45 strike price, receiving a premium of $6, or $600 for one contract.
2. Buy an Out-of-the-Money Call: The investor buys a call option with a $55 strike price, paying a premium of $2, or $200 for one contract.
3. Sell an In-the-Money Put: The investor sells a put option with a $55 strike price, receiving a premium of $6, or $600 for one contract.
4. Buy an Out-of-the-Money Put: The investor buys a put option with a $45 strike price, paying a premium of $2, or $200 for one contract.
The net credit (income) for this strategy is $800 ($1,200 received from the sold options minus $400 paid for the bought options).
Outcome scenarios:
Stock ends between $45 and $55 at expiration: All options expire worthless, and the investor keeps the $800 premium.
Stock ends outside the $45-$55 range at expiration: The profit or loss will vary depending on the exact stock price at expiration. The maximum loss is limited to the difference between the strike prices minus the net credit, which is $200 ($1,000 difference between strike prices minus the $800 net credit).
Stock ends exactly at $45 or $55 at expiration: The investor breaks even, as the profit from the sold options equals the loss from the bought options.
The iron condor strategy provides a way for investors to profit from little price movement while limiting potential losses.
Disclaimer: This article is for informational purposes only and is neither investment advice nor a solicitation to buy or sell securities. Investing carries inherent risks. Always conduct thorough research or consult with a financial expert before making any investment decisions.
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