I am new to this strategy and would like to know how maximum loss is calculated when a trade is initiated. I do know maximum profit is the money you get if all four legs expire worthless / without being exercised.
Okay.. say 100 straddle = 10 and the 95-105 strangle = 6... if you sell the IC, you receive 4. This is your max gain with expiry at 100 Max loss is on or outside the strangle limits. So, expiry at 95 means the 100 put is 5, the rest of the legs = 0. Expiry at 105 means the 100 call = 5 and the rest =. Expiry <95 or >105 means that the max value stays 5... At 94: 100 put = 6 and 94 put = 1, value 5.. etc. So total loss at max = 5-4(credit)=1
Hmm...so for an iron condor context, maximum loss is essentially when the market turns against me and either the 2 CALL legs or the 2 PUT legs get triggered?
European options the max loss is the width of the spread minus the credit. American can be a bit more tricky if there is a dividend involved. Most brokerage houses have quantitative iron condor finders. You might want to play with your brokers platform and see if you tee up an IC. Both Schwab and TOS have finders. Schwab's is on StreetSmartEdge.
Since you want the expiry to be at exactly the short straddle... anything away from that means less profit. It's unlikely that the expiry is exactly on that strike... so probably at least 1 leg will be exercised/triggered. Max is indeed at or beyond the 2nd leg...
IMO, max profit is never the theoretical max. No one lets these spreads go to expiration, even with cash settled indexes. There is a point you will want to exit. You should figure that in to educe your max.
But is my understanding correct, in an iron condor context, maximum loss is essentially when the market turns against me and either the 2 CALL legs or the 2 PUT legs get triggered