A 4-Way Option Spread is the same as an iron condor spread. The option strategy sells an out of the money put spread and an out of the money call spread at the same time. The quantities are equal on both sides, and the option expiration month is the same. The objective of the 4-way spread is to distance yourself from the stock’s trading range and to capitalize on time premium decay. If the stock is equidistant from the short strike prices, the position is also delta neutral. Some traders also use the 4-way spread to take advantage of declining option implied volatilities. Indexes are well-suited for this option strategy because diversification eliminates the surprise component found in individual stocks. An index option also gives traders time to adjust the position as the market migrates to one extreme. Only one of the spreads can possibly be in danger and the margin requirement is the difference between the strike prices on one side less the total credit received. The option margin requirement also represents the maximum position risk.
4-Way Option Spread
January 2, 2009