MNX double diagonal becomes risk-free Iron Condor

Our FEB/MAR double diagonal with short FEB put at 121 and short FEB call at 127.5 has been rolled into MAR for a credit of $5.01.

You may recall we had long hedge against the FEB shorts in MAR with a 116 put and 132.5 call. And remember that we put this trade on initially for a credit of $0.00.

With the FEB/MAR roll, we have all our strikes in MAR. On the put side we’re long the 116 strike, short the 121 strike. On the call side we’re short the 127.5 strike and long the 132.5 strike. That creates a risk of $5.00 on the call side and a $5.00 risk on the put side. And since the MNX cannot settle at expiration at two different strike prices, we have a total risk of $5.00 for this iron condor. The credit received for the roll is $5.01 minus the risk of $5.00 creates a risk-free iron condor.

We’ll have to wait until MAR expiration to see how this trade settles. The worst that can happen is for MNX to settle below 116 or above 132.5. If that happens, we give back our $500. If it settles between 121 and 127.5, we keep the whole $501. Remember also that MNX is a cash-settled underlying. At expiration, everything settles to cash with no stock involved.

Sweet!

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