Trading wide spreads options credit


The difference between the put contract strikes will generally be the same as the distance between the call contract strikes. Because the premium earned on the sales of the written contracts is greater than the premium paid on the purchased contracts, a long iron condor is typically a net credit transaction. This net credit represents the maximum profit potential for an iron condor.

The potential loss of a long iron condor is the difference between the strikes on either the call spread or the put spread whichever is greater if it is not balanced multiplied by the contract size typically or shares of the underlying instrument , less the net credit received. A trader who buys an iron condor speculates that the spot price of the underlying instrument will be between the short strikes when the options expire where the position is the most profitable.

Thus, the iron condor is an options strategy considered when the trader has a neutral outlook for the market. The long iron condor is an effective strategy for capturing any perceived excessive volatility risk premium , [3] which is the difference between the realized volatility of the underlying and the volatility implied by options prices.

Buying iron condors are popular with traders who seek regular income from their trading capital. An iron condor buyer will attempt to construct the trade so that the short strikes are close enough that the position will earn a desirable net credit, but wide enough apart so that it is likely that the spot price of the underlying will remain between the short strikes for the duration of the options contract. The trader would typically play iron condors every month if possible thus generating monthly income with the strategy.

An option trader who considers a long iron condor is one who expects the price of the underlying instrument to change very little for a significant duration of time. This trader might also consider one or more of the following strategies. To sell or "go short" an iron condor, the trader will buy long options contracts for the inner strikes using an out-of-the-money put and out-of-the-money call options.

The trader will then also sell or write short the options contracts for the outer strikes. Because the premium earned on the sales of the written contracts is less than the premium paid for the purchased contracts, a short iron condor is typically a net debit transaction. This debit represents the maximum potential loss for the short iron condor.

The potential profit for a short iron condor is the difference between the strikes on either the call spread or the put spread whichever is greater if it is not balanced multiplied by the size of each contract typically or shares of the underlying instrument less the net debit paid. A trader who sells a short iron condor speculates that the spot price of the underlying instrument will not be between the short strikes when the options expire.

If the spot price of the underlying is less than the outer put strike, or greater than the outer call strike at expiration, then the short iron condor trader will realise the maximum profit potential. Hyde and suddenly I was blowing up my account.

Clearly, I did not know what I was doing. On the verge of giving up, I convinced myself that I was just missing something. And so a quest was born, my friends. But even backtesting offered little hope of success until I discovered my baseline strategy. Rather, I identified a trend to inform the thesis of my strategy. With this information about how the SPY moves I was able to form my thesis and start backtesting.

My put credit spread baseline strategy is pretty simple. Typically you can choose from about 10 credit spreads with different expirations, strikes, and credits received. For my baseline strategy I always choose the spread with the least risk—that is, the credit spread whose short strike is furthest below the current stock price.

In terms of trade frequency I have two other restraints: I only make one trade per day, and I never have two spreads that share the same short strike price though two spreads might have different expiration dates. All of these restraints were born out of trial and error and guided by a mission to keep the baseline strategy as simple as possible. Simply purchasing the SPY and holding it during the same period would have returned In contrast, my baseline strategy returned The next step is bringing in all the fancy signals e.

The beauty of the baseline is always having something to compare against as you optimize the trading strategy.