I am being honest, here is something I don't understand for the most part of strategies.
We sell call and put, then buy call and put with higher-lower strike price on the same day. But how do we keep the profits? Do we need to exercise everything (most options will burn out with 0$ value, isn't it?) and keep premiums or sell until the options expire? In this case, as I think, we'll make a buy back for short options and we gain less… So confusing. Help me please, what do I need to do to execute this right?
/// Thank you for clarifying!!!
explain to me Iron Condor concept, please
byu/pepperpotten inoptions
Posted by pepperpotten
6 Comments
Options as a Strategic Investment, by McMillan. 5th Edition.
Confused.
The idea of Selling an IC , is you Sell two Verticals on a Call one a Put. The short strikes are closer to the money, the ones you buy are further. The Max you can lose is the distance between the Call and Put minus the premium collected. Usually the distance between the Call and Put for both the Put side and the Call side is the same, but if not then use the Max distance.
You Buy back the 4 legs in the future for less money than the Premium if you win. Buying back the entire trade (4 legs) is recommended, but of course Reddit users violate this , lose money and Post here not understanding why.
An IC is a strategy for neutral stocks that do not move much. These profit if the stock stays in a range between the short legs.
As with all credit or sold positions you collect the premium up front and profit if you can close to keep some or all of it. This is “sell high and buy back lower” to profit.
If a short option expires OTM then all of the premiums are kept as profit, but more chose to close early for a partial profit to take off risk.
One to the top messages to all new traders is that exercising is very rare and only needed in unusual cases. Closing options is much better and often makes more profits.
# Iron Condor = short strangle with protection. You need to figure out how what short strangle is first.
Iron condor all you need to do is have the stock close in a range. If the stock is say $50. You sell a $60 call & $40 put. (You buy say a $35 put and $65 call for protection cuz otherwise you have unlimited risk)
Since the call/put you buy are more OTM than the ones you sell, it creates a credit balance.
If the stock ends between your range say $40->$60 by expiration you keep the credit and all your options are worth $0. The closer the range, the larger the credit.
One thing to keep in mind is IV. If a stocks expected move goes up, it’s likely to end up outside your range and so the premiums on all contracts rise which hurts you or vice versa. If the expected move IV drops, you stand to gain as the premium goes down.
https://www.optionsplaybook.com/
Good resource for straightforward explanations of common option strategies