Josip Causic

Iron Condors vs. Condor Spreads

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In my previous article, Flying High With Iron Condors, I described a textbook example of an iron condor. In this article, I will pick up where I left off, and focus on defining the main differences between the iron condor and condor spreads.

It is my belief that studying the iron condor first and completely separately from condor spreads makes the understanding of condor spreads much easier. Therefore, let's briefly review the iron condor from the previous article without any charts or pictures.

Once again, an iron condor is composed of a bear call and a bull put -- both being the vertical credit spreads.

Iron Condor Entry

iShares Russell 2000 Index (IWM): $73.91 on June 3, 2008

Bear Call

BTO + 1 June 76 Call @ -0.69 (debit)
STO - 1 June 75 call @ +1.11 (credit)
Max Profit (Profit/Reward) = + 0.42 (credit)
Max Loss (Loss/Risk) = 0.58

The formula for the max loss is the width of the call strike spread minus the credit received for the bear call. So, in the example above, Max L is: 76 strike minus 75 strikes = 1; 1 - 0.42 of the credit = 0.58.

Bull Put

BTO + 1 June 70 Put @ -0.29 (debit)
STO - 1 June 71 put @ +0.41 (credit)
Max P (Profit/Reward) = + 0.12 (credit)
Max L (Loss/Risk) = 0.88

The formula for the max loss is the width of the put strike spread minus the credit received for the bull put. So, in the example above, Max L is: 71 strike minus 70 strikes = 1; 1 - 0.12 of the credit = 0.88.

Iron condor combined credit is 0.54 (or $54). The amount comes from the credit from the bull put (0.12) plus the credit from the bear call (0.42).

The maintenance that should be held by the broker should be the greater of the two max losses, which would be the one on the bull put.