EXHIBIT 10.3 UPS 60–65–75–80 iron condor.
Although the forecast and trading objectives may be similar to those for
the butterfly, the payout diagram reveals some important differences. First,
the maximum loss is significantly higher with a condor or iron condor. In
this case, the maximum loss is 4.35. This unfortunate situation would occur
if UPS were to drop to below $60 or rise above $80 by expiration. Below
$60, the call spread expires, netting 0.35. But the put spread is ITM.
Kathleen would lose a net of 4.70 on the put spread. The gain on the call
spread combined with the loss on the put spread makes the trade a loser of
4.35 if the stock is below $60 at expiration. Above $80, the put spread is
worthless, earning 0.30, but the call spread is a loser by 4.65. The gain on
the put spread plus the loss on the call spread is a net loser of 4.35. Between
$65 and $75, all options expire and the 0.65 credit is all profit.
So far, this looks like a pretty lousy alternative to the butterfly. You can
lose 4.35 but only make 0.65! Could there be any good reason for making
this trade? Maybe. The difference is wiggle room. The breakevens are 2.65
wider in each direction with the iron condor. Exhibit 10.4 shows these
prices on the graph.