Options Strategies: Iron Condor, Long Straddle, Iron Butterfly, Short Straddle, Covered Call and Covered Put

Module 3 Quiz to Complete:
 Please answer these questions thoroughly and answer each question appropriately,
including examples, thoughts and opinions
 Try and use less citing, but if need be, then that is fine.
 Each question should be a few paragraphs, thank you
 SOURCES: use sources as needed, try and not source too much. But you can if need
be
QUESTIONS TO ANSWER:
Q1: Explain how to build an Iron condor, what are the purposes of an iron condor
strategy? Build a real life iron condor for a stock of your choice, pull the options contracts
and paste them on the answer. Please explain each part of it, what the credit or debit will
be for the transaction, include every detail of each option contract you will use to build the
iron condor trade.
An iron condor strategy is an option strategy which has four different contracts. The
contract is build up by selling one call spread and one put spread on the same underlying stock
with same expiration date. These call and put spread are of equal width. Therefore the strike
price of the two call options is 20 points apart than the two puts option should also be 20 points
apart. These options are generally out of money option. When one sell the call and put spreads,
one is buying the iron condor. The cash collected from this strategy represents the maximum
profit for the position — the underlying assets one of the broad-based market indexes. But many
investors tend to own iron condor positions on stock or smaller indexes (G. Sharma, Rodrigues,
& Dhanuka, 2019).
Iron Condor with Google Inc.
Current price of Google stock $ 1,159.98
Call options :
GOOG Jul 2018 1162.500 call price 5.00 sell strike price 1162
GOOG Jul 2018 1167.500 call price 3.51 buy strike price 1167
Difference in premium 5- 3.51 = $ 1.49
Put options :
GOOG Jul 2018 1157.500 put price 7.94 sell strike 1157

GOOG Jul 2018 1152.500 put price 4.60 buy strike 1152
Difference in premium 7.94 – 4.60 = $ 3.34
If the price of Google stock remains in between $1162 and $ 1157 all the options expire
worthless
And the profit is 1.49 + 3.34 = $ 4.83 . If the price moves beyond 1162 we exit the call option. If
the
Stock moves below 1157 we exit the put options (Crowder, 2017).
Q2: Explain how to build a long straddle, what are the purposes of a long straddle
strategy? Build a real life long straddle for a stock of your choice, pull the options contracts
and paste them on the answer. Please explain each part of it, what the credit or debit will
be for the transaction, include every detail of each option contract you will use to build the
long straddle trade.
A long straddle basically means an options strategy where the investor holds both Call
and Put options with the same exercise price and expiration date. This strategy is more useful
when the investor thinks that the price of the stock may move significantly but unable to predict
in which direction it will be. In other words, a small movement in the price of the stock may lead
a loss to the investor (Sharma & Gopal, 2018). As a result of this, we can say its extremely risky.
We can take this example:
Suppose a call option on a stock with an exercise price of 70 is available for 6 and a put
option for the same stock is available with the same strike price for 8.
Now we are going to buy a call and put options. See the table below
Here S = Stock price
E = Exercise price
Put option
Holder will
Call option
holder will
Gross
profit Premium Net
payoff
Break
even
S<E Exercise Lapse E-S -14 (70-S)-
14 56

S=E Lapse Lapse NIL -14 -14 NA
E<S Lapse Exercise S-E -14 (S-70)-
14 84
Or otherwise, we can say that
If the stock price (on expiration date ) is ,
1-55 Profit is decreasing
56 Break even
57-70 Loss is Increasing
71-83 Loss is decreasing
84 Break even
85 and above Profit is increasing
From the table we can conclude that the investor is making profits when there is a significant
movement in the stock price
Q3: Explain how to build an Iron butterfly, what are the purposes of an iron butterfly
strategy? Build a real life iron butterfly for a stock of your choice, pull the options
contracts and paste them on the answer. Please explain each part of it, what the credit or
debit will be for the transaction, including every detail of each option contract you will use
to build the iron butterfly trade.
In an iron butterfly strategy, there are basically 2 strategies (Lee & Maley, 2017):
Long butterfly: In this, the portfolio consists of
 1 long call with a high strike price
 1 long call with a low strike price
 2 short call with an average strike price
For the same underlying and the same strike date. It is beneficial when the market falls between
the high strike price and low strike price.
Short butterfly: In this, the portfolio consists of