The price the buyer pays for an option, or the price the seller receives for an option, is called the premium. It’s a simple concept: premium is just another word for price.
Credit Spread Option Premium
Establishing a credit spread position involves both the purchase of an option and the sale of an option in the same underlying stock, ETF, or Index. To be a “credit” spread, position must be structured so that the investor receives more money (premium) for the option he sells, than he must pay for the option he buys. The credit spread position results in the difference between the two premiums being immediately credited to his account.
So, in the case of a credit spread, we are really talking about a net premium: the premium collected on the option being sold minus the premium being paid for the option being purchased. That net premium comprises the investor’s income – and it can be considerable and earned every month!
Iron Condor Premium
An Iron Condor is an especially powerful variety of option credit spreads. It is made up of two (2) related option credit spreads – one "bear call" spread and one "bull put" spread, both based on the same underlying stock, ETF, or Index.
Both spreads of an Iron Condor produce a premium and the money from both is added to the investor’s account when the trade is initiated.
The beauty of this – assuming the investor’s account is with an options-friendly brokerage firm – is that only a single margin deposit is required to support both premium-producing credit spreads. Thus you get “twice the income bang for your buck” with an Iron Condor.
Since a properly constructed plain vanilla credit spread can produce a 4-8% monthly return on margin, the Iron Condor can produce twice that rate of return with essentially no increase in risk!
Harnessing the Iron Condor Income Workhorse
If you don’t know them already, you need to understand stock option basics, including how premium is related to volatility and other market factors. Importantly, you need to learn how to identify the most favorable candidates for Iron Condors each month.
It should go without saying that you need to do your homework before committing investment funds to the strategy. We’re saying it anyway!