Long Iron Condor
Entering a long iron condor entails buying (1) lower strike put, selling (1) middle strike put, selling (1) higher middle strike call and buying (1) higher strike call (same expiration month, distance between the two lower legs is equal to the distance between the two upper legs). It's essentially a combination of a lower strike bull put spread and a higher strike bear call spread, and it's similar to a long iron butterfly except the short puts are spread out over two strikes.
(draw a long iron condor risk diagram here)
You're confident a stock will trade in a tight range and not move much from its current position. You employ a lower strike bull put spread, which achieves max profitability when the stock rallies, and a higher strike bear call spread, which achieves max profitability when the stock drops. If you're correct, if the stock doesn't stray too far (preferably stays between the two middle strikes), you'll make money on both legs of the overall strategy.
XYZ is trading at $57.50. You sell (1) 55 put for $2.00 and buy (1) 50 put for $0.50 to complete the bull put spread. Then you sell (1) 60 call for $2.00 and buy (1) 65 call for $0.50 to complete the bear call spread. The net credit is $3.00.
Above the highest strike, all puts expire worthless, and the calls expire in-the-money so additional movement doesn’t change the profit/loss. As an example, at $70, the 50 and 55 puts expire worthless ($0.50 loss and $2.00 gain), the 60 calls will be worth $10 ($8.00 loss) and the 65 call will be worth $5 ($4.50 gain). The net of this is a $2.00 loss.
Below the lowest strike, all calls expire worthless, and the puts expire in-the-money so additional movement doesn’t change the profit/loss. As an example, at $45, the 60 and 65 calls will expire worthless ($2.00 gain and $0.50 loss), the 55 put will be worth $10 ($8.00 loss) and the 50 put will be worth $5 ($4.50 gain). The net of this is a $2.00 loss.
Between the middle strikes ($55 and $60), max profitability is achieved. All calls and puts expire worthless, and your profit is equal to the net credit collected when the trade was initiated.
The PL chart below graphically shows where this trade will be profitable and at a loss.