Wager Mage
Wager Mage
Photo: Magda Ehlers
Generally speaking, most options traders would close a spread like an iron condor before expiration, even if it looks to be expiring worthless. You may do this by “buying to close” the iron condor. If you buy it back cheaper than the price you sold it for, you would profit.
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Read More »If the stock trades between the breakeven prices and the long strikes of your credit spreads, you will begin to take on losses. In this example, losses (not max loss) would occur between $112.01 and $120 on the call side, and $87.99 and $80. Anything outside of $80 and $120 would incur max theoretical loss. Opening your position: To open an iron condor, you would enter a single order to sell both the call and put credit spreads simultaneously, as one package. Keep in mind, if you decide to sell one of the credit spreads before the other, or buy and sell the four individual options separately, you would be “legging” into the iron condor. This can change the potential risk/reward of the iron condor. If you are unable to fill one one of the credit spreads, or one of the options within a credit spread, you could potentially be left with a position you did not intend to put on. Whenever trading iron condors, it is generally best to submit your opening order as one package, using a limit order. Closing your iron condor: If the underlying stock closes between $90 and $110 at expiration, both credit spreads would expire worthless, and you would keep the $2 you collect in premium ($200 overall). In this scenario, there’s nothing to do. If the stock closes below $80 or above $120 at expiration, you would incur the maximum theoretical loss of $8 per spread. In this scenario, one side of the iron condor would expire worthless and the other will be trading at maximum value ($10). Don’t forget, you collect $2 in premium, which would offset some of the $10 loss. For the credit spread trading at maximum value, you can either attempt to buy the spread back before expiration for max loss, or allow your broker to exercise and assign your in-the-money options. Always check with your broker and understand how and when options will be automatically exercised/assigned in your account. Generally speaking, most options traders would close a spread like an iron condor before expiration, even if it looks to be expiring worthless. You may do this by “buying to close” the iron condor. If you buy it back cheaper than the price you sold it for, you would profit. If you buy it back for more than you sold it, you would incur a loss. This ensures you avoid any unnecessary risk from a potential exercise or assignment, which can introduce new risk into your portfolio.
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Read More »Don’t forget: If, at expiration, the stock closes between the short and long strike of either of your credit spreads, there is a chance you could end up with a long or short position of 100 shares of stock. In this example, this would happen if the stock closed at expiration between $89.99 and $80 on the put side and $110.01 and $120 on the call side. If this happens, your potential risk/reward profile completely changes and takes on the risk of 100 shares of stock. The maximum gain/loss discussed above, no longer applies. Add to this that assignment usually happens over a weekend, meaning if the stock gaps up or down on Monday morning, you could see large losses in your account (depending on your long or short stock position). This is yet another reason to be diligent when managing options in your account, and avoid, whenever possible, unintended exercise and assignment of your options. The above examples are for illustrative purposes only and do not reflect the performance of any investment, and do not factor in trading expenses and taxes. Investing involves risk, and you could lose your money.
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