Options Trading - Iron Condor - Yield Enhancement Strategy

Several large brokerage houses including UBS Financial Services, Credit Suisse, Merrill Lynch, and Morgan Stanley have been offering their clients option-based trading strategies referred to as a Yield Enhancement Strategy (YES). The YES strategy seeks to increase returns for investors through the trading of options. Many of these trading program employ a specific options trading strategy called the Iron Condor. The iron condor is an options strategy structure where investors write two short near money options and purchase two long out-of-the money options.

The iron condor strategy can, under certain circumstances, allow an investor to generate a larger net credit relative to downside risk. It is important to also factor in the additional costs associated with option strategies involving multiple purchases and sales due to there being four "legs" of the iron condor trade.

The iron condor trade itself is a combination of two vertical spreads - a bear call spread and a bull put spread and consists of four different options contracts with the same expiration date and different exercise prices.

The investor sells an out-of-the-money call and an out-of-the-money put, while simultaneously buying another out-of-the-money call even further out and another out-of-the-money put further out. This causes a profit diagram that resembles a bird with wings from which the iron condor draws its name from.

Only if an advisor believes that an underlying security’s price will not move much by expiration should consider constructing an iron condor. If the security is not volatile then the investor generates a larger premium while limiting potential loss.

During volatile market condition the iron condor can fail and a loss realized if the underlying security’s price did move and closed outside the inner strike prices. Understanding the maximum potential profit and loss is crucial because the strategy is designed to only generate a small profit while the potential loss is larger than the profit potential. In fact, the potential losses can be many times larger than the maximum potential gain exposing investors to extreme losses under certain circumstances.

Investors who have suffered losses due to a Yield Enhancement Strategy (YES) such as the iron condor are encouraged to contact us at (800) 810-4262 for consultation. At Gana Weinstein LLP, our attorneys are experienced representing investors who have suffered securities losses due to the mishandling of their accounts. Claims may be brought in securities arbitration before FINRA. Our consultations are free of charge and the firm is only compensated if you recover.