Lecture Notes: Understanding the Iron Condor Option Strategy

Key Topics Covered

1. Overview of Option Chains and Time Decay

   • Explanation of out-of-the-money calls and puts.
   • Time decay in options leads to their gradual loss in value.
   • Example: 90 strike put initially trading at 335 by 350 reduces to 11 by 15 as expiration nears.

2. Introduction to Iron Condor Strategy

   • An iron condor allows traders to benefit from time decay.
   • Involves trading four options: selling an out-of-the-money put and call, and buying a further out-of-the-money put and call.

3. How Iron Condor Works

   • Example setup with stock XYZ at $75:
     • Sell 85 call for $2, sell 65 put for $2.
     • Buy 90 call for $1, buy 60 put for $1.
   • The goal is for the stock to stay between the sold strikes.
   • Profit is made if options expire worthless.
   • Net profit example: $200 from sold options minus $100 loss on bought options results in $100 profit.

4. Risk Management and Potential Losses

   • Maximum loss scenario explained if stock moves unexpectedly.
   • Example: Stock moves to $96, net loss calculated as $300.
   • Maximum loss is limited to the width between bought and sold strikes minus net entry price.

5. Practical Trading with Iron Condor

   • Monitoring iron condor as a single trade on platforms like thinkorswim.
   • Example: Sold iron condor at $1.12, current trading at $0.82 with a $30 profit.
   • Maximum profit and loss explained using entry prices and strike widths.

6. Setting Up an Iron Condor Trade

   • Choosing strikes based on probability in the money.
   • Example trade with Tesla:
     • Short call and put at 260 and 187.50, long call and put at 265 and 182.50.
     • Maximum profit $101, max loss $399.
   • Adjusting strikes to improve risk-to-reward ratio.

7. Variations and Adjustments

   • Different variations of iron condor depending on strike selections and expirations.
   • Encouragement to explore further through their website and resources.

Conclusion

• Importance of understanding and utilizing iron condor to leverage time decay effectively.
• Emphasis on risk management and practical execution on trading platforms.
• Invitation to engage with further resources for deeper learning.