The Beauty in Iron Condor Spread

When a trader combines a bull put spread and a bear call spread on an underlying asset, like SPX (which is our favorite index), the trader has created an Iron Condor Spread. Some traders also call this the Short Iron Condor Spread.

To many traders, it is just a combination of 2 credit spreads on SPX. But if they have selected an option-friendly broker, this spread provides the opportunity to further leverage on their investment capital. How?

Let's use an example:

If a trader enters into a bull put spread of 1070/1060 for a premium collection of $1.00 while SPX is trading at 1100, the investment capital required by brokers is $900 per contract. The investment capital per contract is calculated by the spread between the strike price MINUS the total premium received.

In this example, the difference between the strike prices is $10 (1070-1060) while the premium collected is $1.00 per contract. So total investment required is $900 per contract. In case you are wondering, here is our calculation:

($10 - $1.00) x 1 contract x 100 units per contract = $900

After a few days, this trader decides to enter into a SPX bear call spread of 1120/1130 for a premium of $1.20.

If the broker that this trader uses is not an option-friendly broker, the trader is required to have available an additional $8.80 to enter into this new bear call trade.

However, if this trader uses a broker that understands option trading, he will no longer require further trading capital/margin. Why?

Option-friendly brokers understand that technically, this trader can only lose one side of his trades because SPX cannot be at 1070 and 1120 at the same time. Hence, margin relief is provided to this trader. Trading margin is required for only one side of the Iron Condor Spread.

So for the same $900, the trader is able to write 2 contracts on SPX - 1 contract for bull put and 1 contract for bear call.

This is the beauty in the Iron Condor Spread.