Thinking About the KO Iron Condor

I think an iron condor is one of the most interesting complex constructions that you can do with options. It's more fun than Legos or Tinker Toys! . . .

An iron condor is basically a bear call spread and a bull put spread on the same stock with the same expiration month. Put them together, and it creates a price range within which the position is maximally profitable. But if the stock moves above or below that range, profit shrinks and then disappears.


My KO iron condor, which expires at the end of this week, has stalled right at upper level of max profit, with all sorts of bullish signals that threaten to push it over the upper edge of profitability.

I built the KO iron condor:

• Bought a put with a strike price of 50, giving me the right to sell the stock at $50 if I want to
  
• Sold a 52.5 put -- the obligation to buy the stock at $52.50 if that is demanded.
  
• Sold a 57.5 call -- the obligation to sell the stock at $57.50 on demand
  
• Bought a 60 call -- the right to buy the stock at $60 on my whim
  

With that structure (and ignoring fees), the position will have maximum profit between 52.5 and 57.5, and declining profit down toward 50 (51.51, actually) or up to 60 (58.50).

In other words, the max profit range is between the strike prices of the short put and the short call, and the areas of lesser profit push out to the long put and the long call.

I opened the position for a credit of 1.09, meaning that I got $109 (less fees) for each contract that I sold. If the price stays within my max profit range, then all of four options will be out of the money, and will expire worthless.

Altogether, I sold 5 contracts, so the credit before fees was $545.

The stock is now trading at $57.20.

One of my obligations is to sell the stock at $57.50, so no one will want to do that because they would be losing 30 cents immdiately on the trade.

The other obligation is to buy the stock from someone for $52.50, and that's not a good deal, because the stock's owner can sell it on the open market for $4.70 more.

My rights are also unattractive: To buy the stock at more than market price or to sell it at less than market price. Either way, I won't choose to lose money that way.

At the current price it would cost me more the 23 cents to buy back the options in the iron condor, reducing my profit by $115.

But I'm nervous about the position. The bull signals suggest there'll be a further rise, and options expirations sometimes give a slightly bullish bias to stocks on Thursday and Friday of expiration week.

The price is bumping up against resistance. That lowers the pressure to sell. At this point, I'm willing to sell the position for a 10 cent debit, reducing my profit by $50.

I might go higher on Thursday or Friday, depending upon what the price does, but that late in a option's life there's always the risk that there will be no market.

Topics: Coca-Cola, soft drinks
An interesting quandary.

My 10-cent trade is sitting with the specialist at the Chicago Board of Options Exchange, where that combination of options is presently trading for double that amount.

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