Options strategy Iron CondorIron Condor - a spread with limited risk and limited profit, using four different striking prices but the same expiration date. The position is a combination of puts and calls all of which are Out of the money. The maximum profit is realized between the two inner strikes, and the maximum loss is realized outside of the higher and lower strikes.
This strategy is preferable for beginner traders because there is no unlimited risk theoretically, unlike selling straddle/strangle. When selling an Iron Condor (or Iron Butterfly), the trader is neutral.
Because all the options are Out of the money, the trader receives credit for it.
The inner options are being sold, those options worth more than the outer options that being bought, inner options are closer to the stock price, which means their strike is closer to At the money strike (to more expensive options).
If the stock price closes between the two inner strikes at expiration, all the options will expire worthless. The trader will receive all the credit.
Chart example:
Inputs:
Credit recived-> 13.45, Stock price-> 484,
Top Upper strike (Bought) ->560 Call
Top Lower strike (Sold) ->530 Call
Bottom Upper strike (Sold) ->450 Put
Bottom Lower strike (Bought) ->450 Put
Days to expire -> 46
Implied Volatility -> 46.7% (0.467)
Date - > 02/11/2020
Maximum Profit = The credit recived = $1345
Maximum Loss = Difference in Upper (or Lower) Strike – the credit
= 560 - 530 – 13.45 = 16.55
= 450 - 420 – 13.45 =16.55
Maximum Loss = $1655
If the Iron Condor is not balanced (the differences between strikes are not equal like in this example), the calculations are different.
Like selling Straddle / Strangle, the same conclusions about increase or decrease in Implied volatility are true here.
In these conditions, it will take 10 days for the position to enter the profit zone and 35 days to receive 50% of the credit.
This post relates to previous posts.
Ironbutterfly
$IYR Iron Butterfly OpportunityReal estate has been booming along with bonds recently because of the widely expected cut in the Fed funds rate in July. I think that this move has already priced in the rate cut, and so if rates are cut, price will move very little. The risk is that rates are not cut! Check out the AUG-23 weeklies for attractive pricing.
$EEM Iron Butterfly OpportunityIf you follow my ideas you know that I like to be neutral more often than not. I originally was looking at a Calendar spread for $EEM but decided that an Iron Butterfly would be the better trade. It has wider breakevens to cover the majority of the recent range, as opposed to the Calendar, which would require an increase in IV to expand its range. Typically, IV rises when price drops, so Calendars should be slightly short, which I don't want to be here. 8/23 weeklies have attractive pricing.
WHAT I'M LOOKING AT NEXT WEEK (10/24) -- BANC, EWW, XBIFocus in the short term (which is 25-45 DTE for me) will be on ETF's, although opportunities could crop up with earnings (still hoping for a TWTR dip post-earnings to go long via short puts).
Here's what came up on my high IVR/IV screen:
BANC, IVR's 100/IV 100. Options, however, are crappy (monthlies only), but you can get something decent for a 20 delta short put if you're willing to go all the way out to Jan (bullish assumption). The drawback -- in addition to the fact that it only has monthlies -- is that it's a bank. Banks generally aren't known for high volatility, so if you get put the stock, it may be difficult to write calls for something decent to reduce your cost basis if vol collapses at some point going forward here. Things like short strangles or iron condors (which would be vol contraction plays) are cumbersome due to the unavailability of dollar wide strikes.
EWW (the Mexican ETF) IVR 97/IV 32. The general play on this has been bullish on the assumption that Hillary will win, since that's good for Mexico (Donald has said he'll rescind NAFTA, which would be bad for Mexico). I could see further upside if Hillary wins, although it may have priced some of that in already. The Dec 18th 47 short put brings in .70/contract at the mid (bullish assumption; straight premium selling or precursor to covered call). Although this is not the most liquid thing in the world, nondirectional strats like iron condors, short strangles, and iron flies are also workable here.
XBI (the biotech ETF) IVR 88/IV 40. Biotech's been getting a bit of whooping here, and it may not be over, since the notion is that Hillary's bad for pharma and for biotech. She's not keen on high drug prices and has vowed to "do something" to lower drug costs (good luck with that). In any event, the Dec 18th 52 short put brings in 1.07/contract at the mid. (Bullish assumption; straight premium selling or precursor to covered call). A short strangle or iron condor/fly are also doable here.
BUYING TO CLOSE EWZ APRIL 22ND 21P/24P/22.5C/27C BROKEN IRON FLYThis rolled out, "goofy" setup (it basically morphed into a long strangled inverted short strangle upon rolling) has moved into profit, so -- like the LULU short strangle (i.e., broken and rolled) -- I'll look to take it off at NY open for a small profit, so that I can redeploy the buying power elsewhere in a higher probability setup ... .
I'll post the trade chain once I've closed it out ... .
EWZ -- APRIL 15TH 18.5/22/22/25.5 IRON FLYWith volatility ebbing out of the broader markets and earnings season, for all practical purposes, over, I'm looking to put on some small, defined risk, premium selling plays in April while the remainder of my March setups work themselves out. With an implied volatility rank at 60 and an implied volatility of 48, EWZ isn't the greatest play in the world for premium selling, but it is an ETF. They're less volatile than individual underlyings as a general matter, so I lower my premium selling standards accordingly.
There are a couple of different ways that you can look at an iron fly: (1) it's a defined risk short straddle; or (2) it's a really tight iron condor. I tend to treat them as "defined risk short straddles," because I manage short straddles differently from short strangles (an iron condor is basically a defined risk short strangle). With short strangles and iron condors, I look to take the whole trade off as a unit at 50% max profit.
Short strangles and iron flies are a different story. If you look at the metrics for this particular trade, the break evens are quite tight: 19.92 and 24.08 -- much tighter than they would be for a short strangle or iron condor setup, and there is virtual certainty that one side or the other will be tested sometime during the trade since the short options are basically at or near current price. As with all premium selling plays, though, you're looking for volatility to contract rolling into expiry, and you can profit from this circumstance even when -- with iron flies or short straddles -- price has broken one of the short strikes of your setup (but not the long side).
As always, there are trade offs with the setup: max profit is a 2.08 credit ($208/contract; BPE $142/contract). I couldn't get near that much credit if I went with a standard iron condor (an April 15 15.5/18.5/25.5/28.5 iron condor will rake in a whopping .41 in credit at the expense of a BPE of $259/contract). Because of this trade off and the fact that the probability of profit for an iron fly is basically a coin flip as compared to the iron condor's 70-75% probability of profit, I'll look to take this setup off at 25% max profit instead of the usual 50%.
Naturally, this isn't my preferred way of doing things. However, with underlyings below $50/share, you generally cannot take in enough premium if you're going with a defined risk arrangement to make it worthwhile unless you tighten your iron condor or go the "defined risk short straddle" or iron fly.
