Iron Condor - Long Iron Condor

Long Iron Condor

To buy or "go Long" an iron condor, the trader will buy (long) options contracts for the outer strikes using an out-of-the-money put and out-of-the-money call. The trader will also sell or write (short) the options contracts for the inner strikes, again using an out-of-the-money put and out-of-the-money call. The difference between the put contract strikes will generally be the same as the distance between the call contract strikes.

Because the premium earned on the sales of the written contracts is very likely greater than the premium paid on the purchased contracts, a long iron condor is typically a net credit transaction. This net credit represents the maximum profit potential for an iron condor.

The potential loss of a long iron condor is the difference between the strikes on either the call spread or the put spread (whichever is greater if it is not balanced) multiplied by the contract size (typically 100 or 1000 shares of the underlying instrument), less the net credit received.

A trader who buys an iron condor speculates that the spot price of the underlying instrument will be between the short strikes when the options expire where the position is the most profitable. Thus, the iron condor is an options strategy considered when the trader has a neutral outlook for the market.

The long iron condor is an effective strategy for capturing any perceived excessive volatility risk premium, which is the difference between the realized volatility of the underlying and the volatility implied by options prices.

Buying iron condors are popular with traders who seek regular income from their trading capital. An iron condor buyer will attempt to construct the trade so that the short strikes are close enough that the position will earn a desirable net credit, but wide enough apart so that it is likely that the spot price of the underlying will remain between the short strikes for the duration of the options contract. The trader would typically play iron condors every month (if possible) thus generating monthly income with the strategy.