Question

Construct an iron condor spread for IBM stock using near at the money options. You may assume that there are liquid markets n each option at strike prices every two points. Assume the current price of IBM is 90. Sketch the payoff curves at expiration for this trade. Analyze your results in a brief paragraph.

Answer 1

Iron Condor strategy can be created by selling lower out of money put and buying even lower strike out of money put,

selling a higher strike out of money call option and buying even higher out of money call option.

Iron Condor strategy has limited risk and limited profit with the highest risk much larger than the highest profit.

Maximum profit is the net amount received while entering the strategy.

Maximum profit is achieved when stock price at maturity is between the

strike prices of put and call option sold.

For example, if the stock is trading at $90 then buying the put option with a strike price of $80,

selling a put with a strike of $85, selling a call option with a strike of $95 and buying a

call option with a strike of $100.

In this case, maximum profit will be achieved when the stock price at maturity is between $85 and $95.

Payoff Diagram of the strategy is as follows: