Short Iron Condor
“The short iron condor is a limited risk/reward play”
Overview/General Remarks
The short iron condor is likely the most popular of all options strategies and generally for good reason. The short iron condor has the ability to profit within a price range and rather than an outlay of cash at entry a credit is received.
Depending on the strike width selected the iron condor can be very effective and I would encourage any new or experienced investor to consider it apart of their strategy tool belt.
I would likely prefer the short iron condor in periods of increased volatility after a substantial move has occurred. The iron condor is easily adjustable after entry to account for a change in market conditions. However, when making adjustments be sure to account for the original position as well as the “new or adjusted position”. Also be sure not to adjust to early as price can pull back into the required range.
Expectations
Employ this strategy when price is expected to stay within the range of the selected short strikes.
Setup/Construction
Essentially, the sell of a bear call spread and a bull put spread. For a review of the bear call spread click here. For a review of the bull put spread click here.
WARNING – the short iron condor consists of a closer to the money short call and short put. Be aware of the obligations. For a review of these obligations view the basics of stock options page here.
Example Short Iron Condor Spread
Example trade on SPY et. Click to Enlarge.
Max Reward/Loss
Reward is the credit received = .57 or $57
Loss is the strike width minus credit received = $1 – .57 = $.43 or $43
The horizontal sections at either side represent the max loss at expiration. The horizontal section in the center represents the max profit. The dashed vertical lines represent the break even prices for this particular trade.
Price Assumptions
Price will remain within the boundary of the selected spreads. Ideally within the two short strikes.
Key Benefits of the Short Iron Condor
– Hedged position
– Credit received at entry
– Minimal risk
– Reduced margin requirement
– Easy to adjust
“The Greeks”
Again, this is a multiple contract position. Be sure to view the net greek values to determine portfolio effect. For a review of the greeks click here.
Volatility
IV = 15.87%
IV Rank = 17.21%
Selling the iron condor in these market conditions would be at the sellers discretion. I prefer a higher volatility myself but this strategy is versatile and can be engaged in just about any market where price is range bound.
Liquidity
SPY remains a liquid vehicle. Just be sure to check open interest, volume, and bid/ask spreads prior to entering a position.
Probability ITM/OTM
The short iron condor expects price to remain within the range of spreads selected. Therefore it would be preferable to have both sides finish OTM, in this case the entire credit (max profit) would be retained. Inverting the short iron condor would behave similarly to the long iron condor only the risk/reward paradigm is altered. Thus, it would be an unfavorable position in most instances.
Final Thoughts
The short iron condor is a great place for new traders to test the option’s water. They offer many benefits discussed above and with the exception of increased commissions they’re a great way to get a feel for the basics.
The short iron condor could likely be the only option strategy a trader would ever need to consistently pull money out of the market.
Did I forget something important? Let me know below.
Disclaimer
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