The Complete Book of Option Spreads and Combinations: Strategies for Income Generation, Directional Moves, and Risk Reduction, + Website

CHAPTER 12

Condors and Iron Condors

Vertical spreads were one of the very first structures we examined because they’re incredibly versatile, particularly when we replaced an individual option with a vertical spread such as in a call spread risk reversal or in a put spread collar as well as when we combined two similar vertical spreads to create a butterfly. But if we buy the wings and sell the body of an out-of-the-money butterfly, then the underlying stock has to move in order for the butterfly to be profitable and the maximum profit is only achieved if the underlying stock is precisely at the middle strike price at option expiration. If the stock is even a little above or a little below that middle strike price, then the profit realized is less than the maximum potential profit. Since a butterfly is really two vertical spreads that share a middle strike price, what happens if we use two vertical spreads in the same sort of general configuration but select vertical spreads that don’t share a central strike price meaning that the range of maximum profit is wider? That would be a condor. A condor is a spread of two vertical spreads. In a long condor, we’ll buy one vertical spread and sell another vertical spread; the spread we buy is an in-the-money vertical spread meaning both legs are in-the-money, while the spread we sell is an out-of-the money vertical spread in that both legs are out-of-the-money. Let’s look at some call options on Apple (AAPL) and see how we might use ...