Two Credit Spreads: Iron Condor Strategy

An Iron Condor is a strategy used by many traders to help offset risk of a move against a credit spread position; however it is better to be using this option strategy in a neutral market. Not like in todays very volatile very bearish market. I’ll explain so you can see what I mean.

So what is an Iron Condor anyway?

Well, I can assure you it’s not some magical mystical
creature coming to promise you instant riches.

An iron condor represents the design it makes on a
stock graph by entering into a bear call spread and
a bull put spread at the same time.

Your basic steps for an iron condor strategy:

1. Enter a Bull Put As Follows:
A. Sell 1 Out Of The Money Put
B. Buy 1 Out Of The Money Put (lower strike point)
2. Enter a Bear Call As Follows:
A. Sell 1 Out Of The Money Call
B. Buy 1 Out Of The Money Call (higher strike point)

The whole point of an iron condor involves the price at expiration to be between the upper and lower sold strike points.

Many traders try and use this strategy exclusively thinking it will help protect them if the market turns against one of the trades. Unfortunately this is not always the case. For example in this weeks market crash especially today’s downturn, everything happens so fast you do not have time to get out of your bull put spread. If you are able to buy back the spread, you still would most likely lose more in that position than you would gain in the bear call spread.

So moral for today use the correct strategy for the market environment. Right now we are in a bear market so look for Bear Calls!

credit spreads, iron condor, option strategy

Option Spreads Explained

Here is a new to me blog with a good explanation of Option Spreads. Check it out here -

Straight Options versus Debit Spreads - For purpose of meeting the scope of this article, we are only showing the four basic option spreads. They are. Bull Call Spread (debit spread); Bear Put Spread (debit spread); Bull Put Spread (credit spread); Bear Call Spread (credit …

Oh and for one of the latest credit spread choices from Brent Archer check this out here…

Verizon (VZ) slips on Sprint-Clearwire deal - For a bearish hedged play on this stock, I would think about a July bear-call credit spread above the $42.50 range. A bear-call credit spread is an options position that combines the buy and sale of call options to hedge risk in case …

credit spreads, option spreads, verizon

An Introduction to Option Spreads

This is one of my favorite articles it is the basics of what made me interested in learning how to trade option spreads, specifically vertical credit spreads. So here is a walk down memory lane with a post of an article I had written a couple of years ago…

 

Options trading, just like other trading activities, requires a strategy. At the core of many options trading strategies is option spreads. An option spread is the position that is entered when the investor purchases or sells equal numbers of the same kind of options with the same underlying security. However, the strikes prices and expiration dates of these options differ.

Options spreads are divided into three different classifications, which include the horizontal spread, the vertical spread, and the diagonal spread. The options are classified according to strike price and expiration dates.

Horizontal spreads are also known as calendar or time spreads. These types of spreads consist of options with the same underlying security and strike prices. The options in this class have different expiration dates, though.

Vertical spreads are also called money spreads. These spreads contain options with the same underlying security and expiration month. However, the options have different strike prices.

Diagonal spreads consist of a sort of combination of the vertical and horizontal spread classification. The options in this class have the same underlying security, but have different strike prices and expiration dates.

Diagonal spreads are constructed using options of the same underlying security but different strike prices and expiration dates. They are called diagonal spreads because they are a combination of vertical and horizontal spreads.

Within these three spreads classifications, spreads are also classified by what they are designed to do. There are call and put spreads, bull and bear spreads, credit and debit spreads, ratio spreads and backspreads, spread combinations, and box spreads.

A call or put spreads is simply a spread that is created from call options or put options. If the spread is created from call options, it is known as a call spread. If a spread is created from put options, it is known as a put spread.

Bull and bear spreads are those that are created to benefit from a rise or fall in price of the underlying security. Bull spreads benefit from a rise in price, and bear spreads are profitable when the price decreases.

Credit and debit spreads are created based on premiums of the options. A net credit is received when the premiums of the options sold is higher than the premiums of the options purchased. A spread created from these types of transactions is called a credit spread. A net debit is taken by the investor when the premium of options sold is lower than the premium of the options purchased. A spread created from this scenario is known as a debit spread.

Ratio spreads and backspreads are spreads in which an unequal number of options are purchased and written simultaneously. A ratio spread is one in which more options are written than purchased. A backspread is one in which more options are purchased than written.

Spread combinations are just what the name implies, a combination of the different types of spread strategies. For example, an investor can create a bull put spread. This type of spread is created when both a bull spread and credit spread are combined.

A box spread is created from the combination of a bull call spread and a bear put spread. The expiration dates of the call and put options are identical. The resulting constant payoff at the exercise date is equal to the difference in strike values. The box spread basically constitutes loaning money to the counterparty until the date of exercise

 

credit spreads, diagonal spread, option spreads, vertical spreads

AMZN and BZH

Here are a couple of stocks I am looking at *CAUTIOUSLY* for a possible trade -

AMZN - July Bull Put Spread using 60 as a good support. AMZN has been a rocket in this bull market and is most likely way over priced, but for the time being I do not see a slow down in the next month. IS the summer slump not coming? Not sure if the year before an election has anything to do with it but the slump should have started and it seems we are just picking up steam and this one has good solid support at 60. Although the technicals are not saying that the rise will continue it is difficult to assess these technicals with the way AMZN has been rising. We would be looking at a .30 to .35 credit for the July 60/57.5 Bull Put spread.

BZH - July Bear Call Spread using 40 as a good resistance at the 200 dma. The Housing Industry may have seen the bottom but many people are claiming not in any case there is still weakness in the Housing Sector so even in this bull trend I find it difficult for BZH to break the 200 dma at 40 in the next few weeks. So we would be looking at a .50 credit for the July 40/45 Bear Call spread.

Neither of these trades are set in stone and I will continue to watch these two stocks and make a decision next week. We are 50 days away from July expiration which is entirely too long to be in a trade. If we can get in next week and then close the trade with enough gain prior to expiration I will be happy. These are not the most profitable trades out there right now but they are conservative and thats what I like. So we will check back on these next week.

amzn, bear call spread, bull put spread, bzh, credit option spreads