We covered many option principles in previous chapters, so describing an iron condor is a good opportunity to put a lot of those principles to work. In an iron condor, you simultaneously establish a call vertical spread and a put vertical spread. The iron condor can be executed from the long side to profit from an increase in volatility or the short side to profit from a trading range. If the call and put spreads are purchased, the trader is long the iron condor; if both spreads are sold, the trader is short the iron condor.
Combining call and put spreads together can create a unique risk-reward environment. The idea is to establish positions on both sides of the market from which you can take advantage of volatility expansion (long iron condor) or contraction (short iron condor); for example, if you like the theoretical edge provided by a credit spread, an iron condor can enable you to have a positive theoretical edge on both sides of the spread at the same time.
This chapter covers iron condors where the number of options sold equals the number purchased and options expire in the same month. In later chapters, we will explore option strategies in which the number of options sold differs from the number bought and the sides, or legs, of the spread expire at different times and have different strike prices.
A long iron condor is a strategy in which you simultaneously buy a call debit spread and a put debit spread to profit from volatility in ...