Compositedge E-learning- Condor and Reverse Iron Condor

The Iron Condor is a market neutral strategy which comprises of a combination of OUT OF THE MONEY bull put spread and a bear call spread with all the options having the same expiration date. Being a low risk credit spread strategy, it is designed to generate profits in low-volatile, non-directional markets. However, this does not mean that you time your entries when the volatility is low, on the contrary, Iron Condor strategies should be executed when the volatility in the underlying security begins to drop after a period of high volatility.

Key do’s and do nots of the IRON CONDOR strategy-

  • Run the strategy at least a few weeks prior to the expiry of the options contract.
  • Avoid Gamma risk by exiting the strategy at least a few days prior to expiry.
  • Avoid running the strategy just because prices have run up sharply since you never know how far they can rise/ fall.
  • Do not program your strategy based on current volatility, rather wait for volatility in the underlying to settle down before implementing the strategy.

Iron Condor- Strategy Construction
Sell one OUT OF THE MONEY call
Buy one OUT OF THE MONEY call with a higher strike
Buy one OUT OF THE MONEY put
Sell one OUT OF THE MONEY put with a higher strike

Source: Compositedge- Protrader platform

Payoff-
The payoff for an IRON CONDOR is highlighted below
Max profit: Net credit received from writing the options - commissions paid.
Max profits are achieved when the price of the underlying is in between the strikes of the short call and the short put.
Max loss: Difference between the strike price of the long and the short option - premium received + commissions paid.
The strategy encounters losses arise when the price of the underlying <= the strike price of the long put or >= the strike price of the long call.
Breakeven point:Occurs at the strike price of the SHORT OPTION +/- net premium received.

To increase your odds of success, Iron Condor strategies should be implemented when the volatility in the underlying security is dropping, which is also an indication that markets are settling down after a period of high volatility.

 

The Reverse Iron Condor on the other hand is a combination of a bear put spread and a bull call spread, all of which are OUT OF THE MONEY options with the same expiry date. The strategy is exactly opposite to the Iron Condor and is designed when you’re expecting the underlying security to make a sharp move in either direction. The Reverse Condor is a debit spread strategy and can be effectively used during periods of high volatility and has a higher profit potential compared to most spread strategies.

Key do’s and do nots of the REVERSE IRON CONDOR strategy-

  • Advisable to run the strategy a few weeks prior to the expiry of the options contract.
  • Since the strategy is used during high volatile situations, wait for volatility in the underlying to start rising before effecting the strategy.
  • Choose the strikes between the calls and puts appropriately since wider the spread, larger the distance to be covered by the underlying.
  • The strategy generally works well if held until expiry.
  • Since the profit to loss size is negative, timing your entries is extremely important to succeed.

 

Reverse Iron Condor- Strategy Construction
Sell one OUT OF THE MONEY call
Buy one OUT OF THE MONEY call with a lower strike
Buy one OUT OF THE MONEY put
Sell one OUT OF THE MONEY put with a lower strike

Source: Compositedge- Protrader platform

Payoff-
The payoff for a REVERSE IRON CONDOR is highlighted below
Max profit: Difference between the strike prices of the short and long options - premium paid - commissions.
Max profits are reached when the price of the underlying is greater than the strike price of the short call or less than the strike price of the short put.
Max loss: Net premium paid + commissions.
Max losses occur when the price of the underlying is in between the strikes of the long call and the long put.
Breakeven point:Occurs at the strike price of either of the LONG OPTIONS +/- net premium paid.

 

Conclusion-
Just as in the case of all options strategies, timing entries and exits are the key to success, likewise, the Condor strategies when used appropriately can produce high win ratios. However, there may be a number of instances when it is difficult to time the markets. During such cases, selecting the right strike prices could take care of the limitations to a certain extent. One way of following volatility if you’re trading equities is by monitoring the volatility index (VIX) which will give you some information on the present position of the broad market.

 

Compositedge, incorporated in 1995, is a leading discount broker and provider of algo trading solutions for retail customers in India. Headquartered in Bangalore, we provide the internationally acclaimed Protrader platform which comprises of charts, scalper, matrix, grid, time & sales, market-depth and options master in addition to the state of the art algo trading platform. We combine discount broking and algo trading solutions to ensure all our retail clients experience the finest trading amenities at affordable costs.