Short Iron condor

Short Iron Condor

Post By - Manav Saini
Review By : Rohan Sharma
Updated on : October 26, 2021

Basics Concepts – Short Iron Condor

Description - Short Iron Condor

The Short Iron Condor involves putting together a Bear Put Spread and a higher strike Bull Call Spread.
The higher strike put has a lower strike than the lower strike call to create the Short Condor shape.
The resulting position is profitable in the event of a big move by the stock.
The problem is that the reward is seriously capped and is typically dwarfed by the potential risk if the stock fails to move.
Sell one lower strike (OTM) put.
Buy one middle strike (OTM) put.
Buy one middle strike (OTM) call.
Sell one higher strike OTM call.
All options share the same expiration date for this strategy.
For this strategy, you must use both calls and puts. A Short Iron Condor is the combination of a Bear Put Spread and a Bull Call Spread.
The long put strike is lower than the long call strike.
Remember that there should be equal distance between the three strikes.

Introduction to Short Iron Condor

Outlook

With short iron condors, your profile is direction neutral.
You are looking for increased volatility in the stock price, but you are not concerned with the direction.

Rationale

With short iron condors, you are looking to execute an inexpensive, capped yield trade where your maximum profits occur if the stock finishes on either side of the upper and lower strike prices at expiration.
You are anticipating greater volatility in the stock price.

Net Position

This is a net debit trade.
Your maximum risk is your net debit you pay.
Your maximum reward is the difference between any adjacent strike prices less the net debit.

Effect of Time Decay

Time decay is generally harmful to your trade here because you are looking for a lot of movement in the stock price.
After the position has become profitable, time decay becomes helpful.

Time Period to Trade

At least months out.

Breakeven Down = [Middle strike – net Debit]

Breakeven Up = [Middle strike + net Debit]

Steps to Trading a Short Iron Condor

Steps In

Actively seek chart patterns that appear like pennant formations, signifying a consolidating price pattern.

Steps Out

Manage your position according to the rules defined in your Trading Plan.
Remember that the Short Iron Condor is a combination of other strategies, so it can be unraveled in two-leg chunks.
You can unravel the position just before expiration—remember to include all the commissions in your calculations.

Exiting the trade - Short Iron Condor

Exiting the Position

With this strategy, you can simply unravel the spread by buying back the options you sold and selling the options you bought in the first place.
Advanced traders may leg up and down or only partially unravel the spread as the underlying asset fluctuates up and down.

Mitigating a Loss

Unravel the trade as described previously.
Advanced traders may choose to only partially unravel the spread leg-by-leg and create alternative risk profiles.

Exiting the trade - Short Iron Condor

Exiting the Position

With this strategy, you can simply unravel the spread by buying back the options you sold and selling the options you bought in the first place.
Advanced traders may leg up and down or only partially unravel the spread as the underlying asset fluctuates up and down.

Mitigating a Loss

Unravel the trade as described previously.
Advanced traders may choose to only partially unravel the spread leg-by-leg and create alternative risk profiles.

Advantages and Disadvantages

Advantages

Profit from a volatile stock with little capital outlay.
Capped risk.
Comparatively high profit probability if the stock moves.

Disadvantages

The higher profit potential comes with a wider range between the strikes.
The higher profit potential only comes nearer expiration.
The potential loss is far greater than the amount by which you can profit.
Bid/Ask Spread can adversely affect the quality of the trade.
Complicated strategy for the intermediate trader.

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