Option Spread Trading
Two of the most talked about and popular option spread trading methods are the iron condor spread and the credit spread – also sometimes titled the vertical spread.
Actually, the iron condor is the credit spread – just times two. The iron condor spread strategy is composed of two credit spreads – one on each side of the spread.
To construct an iron condor a trader would place an out of the money call credit spread on the underlying asset – while at the same time placing an out of the money put credit spread on that same asset. This could be done in stages – leg in to the position – or at the same time as one four legged iron condor spread trade.
These option spread strategies generate income as the bought and sold options in both credit spreads lose value. As time progresses towards expiration day – the difference in value between the sold and bought option in each credit spread becomes smaller and smaller – until eventually the trader who placed the spread can buy the position back for significantly less than what it was originally sold for.
An illustration of these two credit spreads is -
Put Credit Spread…
Buy 1 iwm 50 put
Sell 1 iwm 55 put
Call Credit Spread…
Sell 1 iwm 70 Call
Buy 1 iwm 75 Call
Or – the entire iron condor together as one trade (exactly the same as above) -
Iron Condor Spread
Buy 1 iwm 50 put
Sell 1 iwm 55 put
Sell 1 iwm 70 Call
Buy 1 iwm 75 Call
photo credit: Tony the Misfit
