Capping the tails with an iron condor

Question

A stock trades at 100. You sell the 90-strike put and the 110-strike call (a strangle) for \4, and you buy the 80-strike put and the 120-strike call as wings for \1, a net credit of \3. Describe your P&L at expiry: maximum profit, maximum loss, and breakevens. Why is this still short volatility but safer than a naked strangle?

Accepted Answer

The structure is an iron condor: a short strangle with long protective wings. Your net credit is \3. Maximum profit is the \3 credit, kept whenever both short options expire worthless, that is for any ST between 90 and 110. Maximum loss is capped by the wings. If the stock crashes below 80, the short 90 put loses while the long 80 put pays; their combined value is the \10 strike gap, so the loss is 10 - 3 = \7. The call side is symmetric: above 120 the loss is also 10 - 3 = \7. Unlike a naked strangle, there is no unbounded tail. Breakevens sit one credit outside the short strikes: 90 - 3 = 8…

Capping the tails with an iron condor

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