- Max Loss = Strike Price of Long Call - Strike Price of Short Call - Net Premium Received + Commissions Paid
- Max Loss Occurs When Price of Underlying >= Strike Price of Long Call OR Price of Underlying
Iron Condors
Writing in-the-money calls is a good strategy to use if the options trader is looking to earn a 最完整Iron Condor铁秃鹰期权交易指南 consistent moderate rate of return.
| Iron Condor Construction |
| Sell 1 OTM Put Buy 1 OTM Put (Lower Strike) Sell 1 OTM Call Buy 1 OTM Call (Higher Strike) |
Profit is limited to the premium earned as the writer of the call option will not be able to profit from a rise in the price of the underlying security.
Offers more downside protection as premiums collected are higher than writing out-of-the-money calls.
Limited profit
As the striking price is lower than the price paid for the underlying stock, any upward price movement will not benefit the call writer since he has agreed to sell the shares to the option holder at the lower striking price. Therefore, the maximum gain to be made writing in-the-money calls is limited to the time value of the premium at the time of writing the call.
The formula for calculating maximum profit is given below:
- Max Profit = Net Premium Received - Commissions Paid
- Max Profit Achieved When Price of Underlying is in between Strike Prices of the Short Put and the Short Call
Greater downside protection
As the premiums received upon writing in-the-money calls is higher than writing out-of-the-money calls, downside protection is greater as the higher premium can better offset the paper loss should the stock price go down.
The formula for calculating maximum loss is given below:
- Max Loss = Strike Price of Long Call - Strike Price of Short Call - Net Premium Received + Commissions Paid
- Max Loss Occurs When Price of Underlying >= Strike Price of Long Call OR Price of Underlying
Breakeven Point(s)
There are 2 break-even points for the iron condor position. The breakeven points can be calculated using the following formulae.
- Upper Breakeven Point = Strike Price of Short Call + Net 最完整Iron Condor铁秃鹰期权交易指南 Premium Received
- Lower Breakeven Point = Strike Price of Short Put - Net Premium Received
Example
Suppose the stock XYZ is currently trading at $50 in June. An options trader decides to write a JUL 45 covered call for $7. He pays $5000 for the 100 shares of XYZ and receives $700 in premium giving a net investment of $4300.
The stock then rallies to $55 at expiration and the call gets assigned. As per the options contract, the trader has to sell the 100 shares of XYZ at the striking price of $45 and so he receives $4500 for the shares sold. Since his original investment is $4300, his net profit for the entire trade is only $200.
However, should the stock price go down to $45 instead, he still makes a profit since the $700 in premiums received more than offset the $500 in paper loss of the 100 shares he held which has lost $5 a share in value.
At $45, the call most likely will not get assigned since there is no intrinsic value left 最完整Iron Condor铁秃鹰期权交易指南 in the option. Since the shares did not get called away, the call writer can either sell the shares for $4500 giving him a net profit of $200 for the entire trade or write another call against the shares held.
Note: While we have covered the use of this strategy with reference to stock options, the iron condor is equally applicable using ETF options, index options as well as options on futures.
Commissions
Commission charges can make a significant impact 最完整Iron Condor铁秃鹰期权交易指南 to overall profit or loss when implementing option spreads strategies. Their effect is even more pronounced for the iron condor as there are 4 legs involved in this trade compared to simpler strategies like the vertical spreads which have only 2 legs.
If you make multi-legged options trades frequently, you should check out the brokerage firm OptionsHouse.com where they charge a low fee of only $0.15 per contract (+$4.95 per trade).
Similar Strategies
The following strategies are similar to the iron condor in that they are also low volatility strategies that have limited profit potential and limited risk.
Lesson 39 – Iron Condors
In addition, strikes A and B are below the underlying and strikes C and D are above the underlying.Usually the pairs of strikes (A,D) and (B,C) are equidistant from the underlying at the time of initial setup but not necessarily (in which case the iron condor is called a “broken” 最完整Iron Condor铁秃鹰期权交易指南 iron condor and is taking a directional bias.
For the sake of illustration and simplicity, we will consider the 最完整Iron Condor铁秃鹰期权交易指南 case of a short iron condor using equidistant strikes. So, there are one slightly OTM short put, one slightly OTM short call for the inside legs, a further OTM long put and a further OTM long call for the outside legs.
1) Buy one XYZ Jul 20xx $95 Put
2) Sell one XYZ Jul 20xx $99 Put
3) Sell one XYZ Jul 20xx $101 Call
They are very similar to short iron butterflies except that they usually carry less risk and less potential profit due to the short options not being ATM. In addition, you have a higher probability of realizing the maximum profit than in the case of short iron butterflies.
1) Buy one XYZ Jul 20xx $95 Put
2) Sell one XYZ Jul 20xx $99 Put
3) Sell one XYZ Jul 20xx $101 Call
As expiration approaches, small changes in the underlying can have a high impact on the price of the iron condor in terms of percentage (i.e., Gamma is high as you get close to expiration). So, your window for profit is narrow and your profit situation could change dramatically as expiration approaches.
Sell one put at a higher strike (strike B); this short put would also be OTM but closer to the underlying
Sell one call at an even higher strike (strike C); this short call would be OTM, and equidistant from the underlying with respect to strike B
1) Buy one XYZ Jul 20xx $95 Put for $2
2) Sell one XYZ Jul 20xx $99 Put for $2.75
3) Sell one XYZ Jul 20xx $101 Call for $2.25
4) Buy one XYZ Jul 20xx $105 Call for $1.5
Net credit of $1.5 (-$2 + $2.75 + $2.25 – $1.5)
1) Strike B minus the net credit received
2) Sell one XYZ Jul 20xx $99 Put 最完整Iron Condor铁秃鹰期权交易指南 for $2.75
3) Sell one XYZ Jul 20xx $101 Call for $2.25
4) Buy one XYZ Jul 20xx $105 Call for $1.5
2) Sell one XYZ Jul 20xx $99 Put for $2.75
3) Sell one XYZ Jul 20xx $101 Call for $2.25
4) Buy one XYZ Jul 20xx $105 Call for $1.5
2) Sell one XYZ Jul 20xx $99 Put for $2.75
3) Sell one XYZ Jul 20xx $101 Call for $2.25
4) Buy one XYZ Jul 20xx $105 Call for $1.5
· The maximum profit of $1.5 if XYZ is between $99 and $101 at expiration
· The breakeven points at $97.5 and $102.5
If the underlying is close to or between strike B and strike C, then the short options carry more weight in determining the net value of the spread. Therefore, the spread will increase in value if volatility deflates.
SPY Iron Condors
I came across the results of a SPY buy and hold vs SPY iron condors back test.
Their conclusion seems to be that the iron condors underperform vs buy and hold. My thought was that with $100000 you could afford more (much more?) 最完整Iron Condor铁秃鹰期权交易指南 最完整Iron Condor铁秃鹰期权交易指南 than 1 contact per day and with some napkin level math it seems if you held SPY with whatever capital you weren't using or moved up the number of contacts the options should come out on top? I'最完整Iron Condor铁秃鹰期权交易指南 最完整Iron Condor铁秃鹰期权交易指南 m sure I'm missing something. These are somewhat old so forgive me if this has been discussed ad nauseum.
If you do this with margin then its a different story. You can stay invested in SPY and sell IC. It's double dipping.
Depends. Look at the results of the worst draw down and sharpe ratios. I read this as the options strategies effectively managed risk over this time period.
Hmm, interesting. Not sure I like their strategy of selling 1 condor per day. Doubt anyone trades like IRL. Would like to see how using 50% of the 最完整Iron Condor铁秃鹰期权交易指南 port on the 1st of each month in SPY IC works out.
It’s important to understand that backtesting is 最完整Iron Condor铁秃鹰期权交易指南 useful but it would require similar market performance over the same period going forward.
It’s very hard to beat buy and hold in a 10+ year bull market. Backtests that will show outperformance are unrepeatable high beta portfolios, leveraged long strategies, long /ES, naked puts selling, long delta long options etc.
Look at the US markets between the mid 60’s and early 80’s. It traded pretty flat and was actually negative when accounting for inflation. We are in a similar position now - bad monetary policy, record inflation, comatose economy. A solid derivatives strategy would probably vastly outperform under 最完整Iron Condor铁秃鹰期权交易指南 最完整Iron Condor铁秃鹰期权交易指南 those circumstances.
Some things to think about are, is anyone actually trading a portfolio of 100% S&P? I suspect that’s a very small percentage of traders. Most people strive for a blend of assets classes and styles to gain alpha. In that case, it’s good to know but only relevant when comparing your own portfolio beta, alpha etc.
iron condor
There are several different types of option spreads such as verticals, calendars, butterfly, strangles and iron condor. They all 最完整Iron Condor铁秃鹰期权交易指南 have different ways of generating a profit and used in different trading scenarios. This article, however, is going to explain 最完整Iron Condor铁秃鹰期权交易指南 the benefits and when to use one of these option spreads, the iron condor.
First, in my opinion the iron 最完整Iron Condor铁秃鹰期权交易指南 condor should only be used under the following conditions.
When the volatility (VIX) is below 40
VIX is channelling between 25 or 40
Credit of $0.50 or greater ($0.70 is ideal)
Second, the iron condor will produce money faster than other option spreads but carries more risk. Since you are selling this spread, it is a credit spread and therefore receive your money when you place your trade. However, since the iron condor has a low and high trading range, the stock can move out of this range causing the trader to lose money and either will have to close out the trade or make adjustments. This is less likely to happen if the volatility is below 40 and the trade is made and held during non news changing events for that stock or index.
Third, the condor can be used on any stock or index however, I recommend using it with high volume traded indexes such as the DIA or SPY. Since these indexes have very high volume it is much easier to find the desired trading range. If the stock is not highly traded then it may be more difficult to set up your trade. For example, you want to purchase a 27 call, but only a 20 or 30 is available. When this is a case, it will make it more difficult to meet the credit spread of $0.50 or greater.
Finally, the iron condor makes a great trading strategy when combined with other monthly trading strategies such as 最完整Iron Condor铁秃鹰期权交易指南 a combination of another condor used on a different stock or index or a different but complimentary spread to the condor. This combination makes a nice options portfolio and will be easy to manage and allow less time to monitor.