Long Iron Condor

 

“The long iron condor is a limited risk/reward play”

 

Overview/General Remarks

The long iron condor strategy is, in my opinion, undervalued by most option traders. I generally like buying vertical spreads and the long iron condor presents an opportunity to hedge one side against the other.

That said, I must admit I don’t often trade it myself because I typically only buy vertical spreads when I’m fairly confident in one direction over the other. Buying a put vertical when I’m confident the price will move higher would be counterproductive or vise versa.

I would likely engage a long iron condor after a long period of sideways price movement. I would expect a decent move is coming but given the period of no movement identifying a direction may prove difficult.

 

Expectations

Employ this strategy with the expectation price will move up or down beyond the selected strikes.

 

Setup/Construction

Essentially, the purchase of a bull call spread and a bear put spread, simultaneously. For a review of the bull call spread click here. For a review of the bear put spread click here.

WARNING – The long Iron Condor consists of a short call and a short put. Be aware of the obligations!

 

Example Long Iron Condor Spread

Example trade on SPY etf. Click to Enlarge.

 

Max Reward/Loss

Reward is strike width minus debit = $1 – $.48 = $52.00

Loss is debit paid = $.48

The horizontal sections at either side represent the max profit at expiration. The horizontal section in the middle represents the max loss for this position. The dashed vertical line represents the break even prices.

 

Price Assumptions

Price will extend beyond the boundary of either the put or call spread.

 

Key Benefits of the Long Iron Condor

– Hedged position

– Minimal risk

– No directional prediction required

 

“The Greeks”

Remember this is a multiple contract position. As such you’ll be looking at the position greeks to conclude portfolio effect. For a recap click here.

 

Volatility

IV= 15.87%

IV Rank = 17.21%

Buying the iron condor in these conditions would likely be acceptable but by no means preferred. As of this writing price has become stagnant and direction is difficult to conclude.

 

Liquidity

SPY remains a liquid vehicle. Just be sure to check open interest, volume, and bid/ask spread prior to initiating a position.

 

Probability ITM/OTM

The long iron condor expects price to exceed the boundary of either the put or call side. Therefore, it would be preferred to have one side move ITM and one side move OTM. Generally both spreads are entered OTM. Entering a long iron condor with both sides ITM (Inverting) would be similar to a short iron condor only no credit would be received and the risk/reward paradigm would change. Thus, it would likely be an unfavorable position.

 

Final Thoughts

The long iron condor is a strategy that should probably be used sparingly. The increased commissions alone make it tough for smaller investors to trade this strategy very often.

 

Have a question or concern? Let me know below.

 

Disclaimer

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