Price of Iron Condor

Discussion in 'Beginner Traders' started by Jevgenijs, Nov 11, 2017.

  1. Jevgenijs

    Jevgenijs New Member

    hi, I've just started to trade options, and there is sth concerning iron condors that I can't understand.
    initially, I believed that I wd make money on my iron condor if the price will end up somewhere between my short call and short put. But I realised that the price behaviour of the condor is much more complex: one day, as the price started to depreciate quickly, my p&l also started to get lower, so I found myself with a position which was theoretically profitable but in reality with Delta about 33 I was deep in the red.
    So now I really not sure how the price of IC is changing. My biggest questions are:
    1) Is it still correct that if at the day of expiration the price will finish between my short call and short put I'll make money on this trade (meaning full credit received)?
    2) additionally, why the IC price changes so much when I'm just getting close to one of my shorts? will this change of the price result in my losses even if the price at expiration will stay between the shorts?
    3) Do I need to pay attention to current P&L if I'm really interested in my spreads expiring worthless?
    4) in software like OptionVue you can watch your position profitability level (like 6-8-10%). What does this figure really mean? Say I received a credit of $500 with margin requirements of $5k. Does this 6% mean that I need to exit my position if P&L is just (6% of 5000 = $300) - and this way i'm not going to wait to the expiration at all?

    thanks in advance.
     
  2. spanturu

    spanturu Member

    As the market price gets closer to one of your short strikes, the probability that that particular short option will be "in the money" at expiration gets higher. As a result, that option becomes more valuable, and since you are short that option, you will show a negative P&L. For example, let's say you sold the 2600 call for $5 when the SPX was at 2550. If the SPX gets to 2590, that call you're short may now be worth $15, because it now has a much greater chance of ending in the money. Of course, the put you sold is losing value, so you're making money on that side of the iron condor, but if the price movement to the upside is too fast, you will lose more on the side that's being threatened than you gain on the winning side.

    You can still keep the entire credit received if the price of the underlying is in between your short options at expiration, but the problem is: If the SPX is at 2590, and you're short the 2600 call, letting your iron condor ride until expiration (without adjusting) is very risky. It's quite likely that the market will blow past your short strike and the losses could be substantial.

    Your post reflects serious a lack of understanding of the finer points of options trading; I don't think you should be live trading for now. Keep studying and paper trading before you put real money on the line.
     
  3. status1

    status1 Well-Known Member

    Yes that is correct but are you certain that it will stay there and can you stomach the potential losses if it goes past your short strike ?
    Not only the losses are getting bigger as the underlying is getting closer to your short strike but it's also getting there faster because of gamma There is also volatility to think about which also a big factor on how much credit you receive upfront versus the amount of margin you have to put up to get that credit
    So there are a lot of moving parts to consider with any option strategy
    You can't just place an iron condor and assume that the underlying will stay between the short strikes unless you are far out of the money and even then there is a small chance of a loss

    I would say if you can make 6% in a short amount of time than it's a lot better to exit than to wait until expiration and risk losing 5K just so you can make another 4%
     

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