Study after study shows you really don't. At best the odds of holding a profitable option at expiration are about 1 in 8. Direction is either up or down but distance and time are far more complicated. Attribute 50/50 odds to correctly choosing each of the three elements. Some simple odds demonstrate the difficulty in getting all three of these correct. To review, the options buyer has to be correct about three things:Īll three have to be in confluence to create a profitable trade for the options buyer.
![iron condor example iron condor example](https://www.xtremetrading.net/wp-content/uploads/2018/06/iron-condor-overview-pt-2.jpg)
However, each day that goes by a little more value is lost in that option, making the likelihood of a profitable trade more remote if the stock doesn't do what the buyer hopes. If the market quickly moves favorably for the options buyer, there is a chance to make a profit if he quickly closes his trade.
![iron condor example iron condor example](https://optionstradingiq.com/wp-content/uploads/iron-condor-strategy-example.png)
Correctly picking the direction and the strength of the move in that direction is worthless if the target is met after expiration day. So you can be correct as to the strike price but can still make no money because you haven't covered your cost of purchasing the option.įinally, the greatest difficulty the options buyer has to contend with is time. Additionally, not only does the price of the stock have to reach $220, but the buyer also has to include the price of the option (for example, $5), which means the stock price has to go even further before he makes money. This is an example of getting the direction right but the distance wrong. If he buys an option believing that Apple's stock price will go to $220, then Apple has to go to $220 and not just to $210. The options buyer can't just pick the right direction he also has to pick the right distance the price will move. Regardless, picking the correct direction is crucial for the stock buyer and also for the options buyer. You, the ordinary investor, have access to no information that gives you an edge in the marketplace. An analyst who does nothing but study a certain company for years, talks to the CEO, knows the business inside and out, and even works at the company can still pick the wrong direction for the company's stock price. He also has to be concerned with two additional factors: time and expiration.Īctually, picking the right direction is extremely difficult. The buyer of options has to do the same thing, pick the right direction, but that's not all. If the stock goes up and they sell, they make money. Those who buy stocks have to get only one thing right: direction. He does, however, have a few things working against him. He leverages his money through the purchase of options and can make returns several times his initial cost.
![iron condor example iron condor example](https://tradeoptionswithme.com/wp-content/uploads/2018/11/EWZ-iron-condor-trade-example-300x90.jpg)
The buyer has the advantage of potentially unlimited gains. Which is better, to be a buyer or a seller? There are many factors that affect that decision, so there really is no "better." Both offer advantages and disadvantages. Consequently, the two call options are in the money but the two puts expire worthless.Profiting with Iron Condor Options: Strategies from the Frontline for Trading in Up or Down Markets For the other condition, the stock price is higher than the highest strike D. It is reached when the stock price is between the higher put strike and lower call strike (the two short positions) and the options all expire worthless. The maximum loss of Iron Condor is reached when the stock price is lower than the lowest strike A, then the two call options become worthless, the two puts are in the money. As seen in the payoff plot, the maximum profit comes from the options premium because the deeper OTM options are cheaper than the shallower ones.
![iron condor example iron condor example](https://optionstradingiq.com/wp-content/uploads/Vix-contango.png)
Plt.title('Long Iron Condor Strategy Payoff',fontsize = 20) Plt.xlabel('Stock Price at Expiry',fontsize = 15) Plt.plot(price, payoff, label = 'Long Iron Condor',c='black') Plt.plot(price, payoff_long_call, label = 'Long Call',linestyle='-') Plt.plot(price, payoff_short_call, label = 'Short Call',linestyle='-') Plt.plot(price, payoff_short_put, label = 'Short Put',linestyle='-') Plt.plot(price, payoff_long_put, label = 'Long Put',linestyle='-') Premium_put_lower = 2 # the premium of OTM put(Lower k) Premium_put_higher = 10 # the premium of oTM put(Higher k) Premium_call_lower = 10 # the premium of OTM call(Lower k) Premium_call_higher = 2 # the premium of OTM call(Higher k) K_put_lower = 750 # the strike price of OTM put(Lower k) K_put_higher = 780 # the strike price of OTM put(Higher k) K_call_lower = 820 # the strike price of OTM call(Lower k) K_call_higher = 850 # the strike price of OTM call(Higher k)