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How To Calculate Iron Condor Break-Even Prices - YouTube
Channel: Option Alpha
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all right hey everyone this is kirk here
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at option alpha
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and in this video i'm going to go
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through iron condor break even prices
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yes because there are
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multiple breakeven prices for iron
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condor so take your time with this video
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but i promise you if you watch all the
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way through you're going to get a lot
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out of this and how to understand
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how to calculate these breakeven prices
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for our condors
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so the first thing that we're going to
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do is start with a simple payoff diagram
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this is a simple payoff diagram
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structure that we can use
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for our iron con iron condor and
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remember that an iron condor has
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this payoff structure so has four pivot
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points i don't know why they call it
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iron condor but they do maybe looks like
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a flying bird
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but essentially it pivots at four
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different places and this is
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really how we start building the
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framework around calculating
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the breakeven points so it pivots at
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four different places which send the
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iron condor payoff diagram
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up through the breakeven point right
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here and then
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this is your potential profit zone in
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here but then another break-even point
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in pivot point
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sends the iron condor payoff diagram
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down through this breakeven point here
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so this is why we say that it has
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two breakeven points we've got the
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breakeven point here breakeven point one
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essentially and then we've got this one
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here which is breakeven point two
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and you do have to calculate both
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because this is how we determine
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the probability of success or how wide
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the position is or
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you know basically our range that we're
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looking for the stock to trade in before
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expiration so to build out this iron
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condor
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again what you need to understand is the
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different prices of the contracts that
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you had
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bought and sold the entire way through
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so we're going to go through this
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in very simple fashion so that you
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understand exactly
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how it works let's assume right now for
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the sake of argument that the stock
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we're trading this on is trading at 100
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even so the stock is trading right here
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right in the middle of our iron condor
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position and we just simply want to take
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a position where we assume that the
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stock is going to go
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generally sideways between now and
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expiration so in this case what we might
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do
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is we might sell a put option here so
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i'll just put negative 1
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p for a put option and this will be a
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put option that we
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sell at the 95 strike price
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so that'll be the strike price of that
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particular point this is where pivots on
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the payoff diagram then on the put side
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we have to buy
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another put option to give ourselves
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defined risk in case the stock really
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starts tanking
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and so here we're going to buy a put
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option so we'll say plus one
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for a put option which is p and then
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this is going to be
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at the 90 strike so we'll just give this
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a 90 strike here and you can see on the
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put side now we have a five dollar wide
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spread on the call side we're going to
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do the same general principle and
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process
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except with call options so we're going
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to sell one call option here
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we'll do this at the 105 strike price on
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the call side
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and then notice that we have to go even
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further out to buy our long
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call option contract here so we'll say
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plus 1c and we'll do this contract here
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at 110 now this is a pretty even
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and balanced iron condor and i did this
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on purpose because i want to make sure
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you guys understand exactly how to
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calculate these break even prices
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although even if you have breakeven or
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sides of the
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iron condor that are uneven say the 105
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and the 115 or the 105 and the 106
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you can still use the same process to
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calculate breakeven points
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in our case here we have a five dollar
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wide spread on the put side
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and a five dollar wide spread on the
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call side
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now what we need to do is we need to
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figure out the prices of each of these
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particular sides to the iron condor or
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each of these individual contracts
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so we'll start up here with the short
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put option that we sold
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let's say that we sold this put option
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for two dollars
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and 35 cents
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so this is the price that we collected
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for selling this
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one 95 strike put option on the call
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side let's assume that we sold
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this one strike call option at 105
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for two dollars and 80 cents so we
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collected these premiums this is a
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starting point that gives us
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the total premium that we've collected
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so far however we use some of those
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premiums to purchase these outside wings
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or these outside legs
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to give us defined risk so let's assume
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for this
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example that we bought the one 90 strike
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put option down here below
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for two dollars and we bought this
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one call option at 110 strike
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for two dollars as well this just makes
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the math a little bit easier for us
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although i do make it a little bit
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complicated so you actually have to do
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these calculations you can't do them in
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your head necessarily
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you can do them through scratch paper if
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you want to as well
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so now that we have the prices of all
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the individual contracts
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now what we can do is we can total up
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each side and this is how i do it i
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total up each side of the spread
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and then that gives me my total credit
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and i use that total credit for the
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purposes of calculating
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the breakeven price so i'll do this over
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here so you guys can see this but
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in this case we have our put side spread
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and we have our call side spread
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on the put side spread we had sold this
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95 strike put for two dollars and 35
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cents
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but we had used some of that premium to
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buy the 90 strike put
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so our net credit that we collected was
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still
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35 cents so that was the net credit that
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we collected
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on the call side or i'm sorry on the put
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side was still a 35 cent net credit
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on the call side our short 105 and our
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long 110 call
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we had sold the 105 for two dollars and
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80 cents
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we bought the 110 for two dollars so
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that means that we still collected a
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credit of 80 cents
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on the call side let me just make this a
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little bit better for you since my
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writing
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isn't that good when i write eight make
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it a lot easier for you to understand
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there we go so now we have our credits
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for each individual side we have our put
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spread side
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and our call spread side and our total
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credits that we've now collected on this
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position
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are a dollar fifteen now this is really
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important because this dollar 15 here
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is very helpful for not only determining
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what our potential profit is which is
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here
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this is our max profit 1.15 that's the
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difference between all of these
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different contracts in here
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but this is going to be used to
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calculate break even one and break even
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two here
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and so what we're going to do now is
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we're going to use the dollar 15 credit
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and we're going to calculate break even
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price 1.
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so we're just going to put over here b e
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one so that we can go through the
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calculation together
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now to calculate breakeven point one we
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basically take
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the short put option strike price which
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is ninety five dollars
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so we take ninety five dollars and we
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subtract
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the credit that we had received on our
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total iron condor position
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so 95 strike put option we subtract the
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total credit received and you actually
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can
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visually see this here this is the way i
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always think about it is that when you
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see the breakeven point of 95 or the
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strike
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price of 95 in order to get to the
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breakeven point here which is further
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out on the payoff diagram
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you actually have to subtract and go
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backwards down the payoff diagram
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so that's how i know and that's how i
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usually remember that i take the 95
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strike
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option here and i subtract the credit
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received which is 115
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and when i subtract the 115 that leaves
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me with breakeven's
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price number one or breakeven point
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number one at
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93.85 so that is our first
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breakeven point there 93 85 is our first
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break even point
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now to calculate breakeven point number
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two so be2
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we basically are going to do the same
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thing just in the opposite direction
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with the call option
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so we take the strike price of our short
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call option here which is 105
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and notice that we have to travel up the
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payoff diagram to get to breakeven point
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number two
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so instead of subtracting the credit
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that we received we actually add the
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credit that we received of one dollar
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and 15 cents
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so one dollar and 15 cents here gives us
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a
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break even point at number two of 106
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15. so that is our second breakeven
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point
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and that's essentially how you do it
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it's really not any more complicated
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than that
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as you start going through calculating
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breakeven points on iron condors
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it does get a lot simpler as you start
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doing it over and over again
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so i really encourage you to draw it out
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like this if you want to on a scratch
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piece of paper on an ipad something
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where you can actually start doing these
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calculations and we deliberately did not
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make this
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really easy with round numbers here i
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wanted to make it a little bit more
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difficult so you understood
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exactly how all these calculations work
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but again just as a reminder
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to calculate the first breakeven point
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on an iron condor
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you take the strike price of your short
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put option contract
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you subtract the credit received that
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gives you your first break even point
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the second breakeven point you take the
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strike price of your short call option
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contract
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and you add the credit received that
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gets you your second break even point
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here
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and now we know that ideally we want
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this stock to trade anywhere between
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93.85 and 106.15 between now and
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expiration
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and if it trades between 95 and 105
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which is
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our two strike prices we know that we
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make our total profit
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total max profit here of 1.15 by
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expiration
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so hopefully this helps out as always if
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you have any questions at all on this or
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anything else
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options related let us know and until
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next time happy trading
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you
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