Credit spreads and iron condors
Selling an option on its own collects premium but leaves the loss open. A credit spread adds a second, cheaper option further out as insurance, and caps both the gain and the loss. Put a put spread below the stock and a call spread above it, and you have an iron condor: a bet the stock stays in a range.
The bull put spread
Sell a put below the stock price and buy a put further below, same expiry. You take in a credit and keep it all if the stock ends above the short strike. Below the long strike the loss stops growing.
max profit = credit · max loss = strike width − credit · breakeven = short strike − credit
An example: with the stock at $105, sell the $100 put for $4.50 and buy the $90 put for $1.50, a $3.00 credit. Above $100 you keep $300 a spread; below $90 you lose ($10 − $3) × 100 = $700; the breakeven is $97.
The bear call spread
The mirror image above the stock: sell a call, buy a higher one. It pays if the stock stays below the short call, with the same max profit and max loss, and its breakeven is the short strike plus the credit.
The iron condor
An iron condor is a bull put spread and a bear call spread together, usually the same width, around the stock price. It collects both credits and keeps them all if the stock ends between the two short strikes. Only one side can lose at expiry, so the max loss is one spread's width less the whole credit. Bring the short strikes together at the money and it becomes an iron butterfly: more credit, a narrower range.
Choosing strikes and width
- Short strikes: often near the 15- to 30-delta, or just outside the expected move. Further out, the chance of profit rises and the credit falls.
- Width: wider wings collect more credit and risk more in dollars. A common check is a credit of about a third of the width; much less, and the risk is large for what is earned.
- Expiry: 30 to 45 days is the usual balance of decay and room to manage.
- Volatility: credit spreads are short vega. They pay most when IV is high against the stock's past and gain as it falls; a steep skew makes put spreads pay more than calls the same distance away.
Managing them
These are trades with a high chance of profit and losses larger than the typical win, so management decides the result. Common rules: close at half the credit kept rather than waiting for the last few cents; close or roll a side when the stock reaches its short strike; and close a week or so before expiry, when gamma makes a small move swing the P/L hard. Watch the bid-ask spread too: four legs cross four spreads on the way in and out.
In Options Meerkat
The templates (n on a symbol's detail page) build bull put and bear call spreads, iron condors, and iron butterflies at the money, sized by width, and the P/L page (p) gives the credit, max loss, breakevens, and chance of profit. The optimizer (O) ranks spreads and condors for a price target by an expiry, priced at the natural fill. On Pro, the backtest page (R) runs the put-spread, call-spread, and iron-condor presets over the past, with a take-profit, a stop-loss, and a days-to-expiry exit (see backtesting).