Forward-Thinking Options Trading

Iron Condor

Overview:
Iron condor strategies utilize both call and put spreads to make trades on market volatility, without being bullish or bearish. You may buy an iron condor if you think that SPX will trade out of a specific range at expiry. If you sell an iron condor, you may think that SPX will trade within a specific range.

Example:
If you sell a $5-wide iron condor, the max loss will be $500 minus the credit received.

Maximum Profit & Loss:
The maximum profit is the premium received. The maximum loss in selling an iron condor is the (spread width of the call spread or put spread) minus the premium collected at trade entry. The maximum loss in buying an iron condor is the premium paid to enter the trade. Short iron condors also have two breakeven points at expiration, one equal to the strike price of the sold put option minus net credit received, and one equal to the strike of the call option sold plus the net credit.

Keep in mind:
There is assignment risk. Traders of an iron condor strategy should actively manage their position as adjustments may be needed if the underlying asset moves outside the specific range.

Credit Spreads

Overview:
If you do have a bullish or bearish view of the market, you may want to trade bullish or bearish SPX credit spreads. A put credit spread or long put spread is a bullish trading strategy, while a call credit spread, or short call spread, is bearish trading strategy.

Example:
If you are bullish on the S&P 500 Index, sell an SPX put with a higher strike price while purchasing a put with a lower strike price to trade a put credit spread. If you're bearish on the S&P 500 Index, you can sell an SPX call with a lower strike price and buy a call with a higher strike price to trade a call credit spread instead.

Profit & Loss:
When trading either put or call credit spreads, the maximum profit at expiration is equal to the net credit you received from selling and buying the put or call options at different strikes. The maximum loss will be equal to the difference between the call or put strike prices (spread width) minus the credit you received. What's different between the call and put credit spreads is how that profit or loss is achieved:

Put credit spread: maximum profit (net credit received) occurs if the index stays above the strike price of the put you sold. The maximum loss (spread width minus the net credit received), occurs if the index falls below the strike price of the put you bought.

Call credit spread: maximum profit (net credit received) occurs if the index level stays below the strike price of the call you sold. The maximum loss (spread width minus the net credit received), occurs if the index rises above the strike price of the long call, or the call you bought.

The breakeven point for put credit spreads is equal to the strike of the sold put minus the net credit received. The breakeven point for call credit spreads is equal to the strike of the sold call plus the net credit received.