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Iron Condor Definition
Combining Two Credit Spreads to Create an Iron Condor
The risk/reward graph shown below is an Iron Condor. The Iron Condor is created when we combine both a bull put credit spread and a bear call credit spread. For more on what bull put and bear call credit spreads look like please go HERE. If the RUT stays above the short 610 put and below the short 740 call, called the "safe zone", for 55 days, both spreads will expire worthless for the buyer and we as the seller will keep the premium of about $1000. Maintenance for this trade is equal to the maintenance of just one of the spreads. For this particular trade, the maintenance requirement would be $10,000 total, which is one of the powerful aspects of Iron Condors. By opening both the "bottom" Bull Put credit spread, and the "top" Bear Call credit spread, we only have to lock-up maintenance dollars for one of the spreads, thus allowing us to double our ROI. For a typical month where we "complete" the trade with both a bottom spread and a top spread to create an iron condor, we usually achieve a 5% to 8% ROI on the bottom spread and a 4% to 6% on the top spread, for a total of 9% to 14% return in 30 to 45 days. Sometimes, however, we will not have the opportunity to complete the iron condor and we will only have the chance to open either the top spread or the bottom spread; for these months our returns will be a little less.