Stratégies Options - Iron Condor

Exposed to a limited risk, they are widely used by both experimented traders and newbies.

I - Reminders

Iron Condor is a strategy which combines 2 vertical spreads, a otm call spread, and a otm put spread. It is generally entered when the spot is equidistant between the lowest call strike and the highest put strike.

Example:
The spot is 100
Typical Iron Condor would be
- short Put spread 90/80
- short Call spread 110/120

This Iron Condor provides a credit of 5.86 which is the maximum gain for a risk of 10 a maximal possible loss of 10-5.86=4.14.

II - Variation on the same theme

We are used to seeing these Iron Condors such as exposed this above, can be because the literature always presented them so.
Nevertheless, by resuming the definition of the Iron condor helped by the call put parity, we can find a new orientation to Iron Condors.

According to the Call-put Parité we know that a pair of shorts was able to spread 90/80 is identical to a call spread length 80/90.
Iron Condor Short put spread 90/80 and short call spread 110/120 is identical to a long call spread 80/90 and short call spread 110/120.

There we begin to have an idea of the way we can use it.
Rather than to use this presentation of Iron Condor as explained previously, we are going to move the strikes of the higher one: we obtain Skewed Options Iron Condor

III - Skewed Options Iron Condor

To plant the seed, let us imagine that we are bullish on one underlying, but "not infinitely", that is of which we think that underlying can rise, but there is a very improbable high level to be reached

For example, the spot is currently around 100, we think that it will reach easily 110 even 115, but that there is no chance it goes up until 120, and we do not want to take risk beyond.
We wish to stay in a strategy with a perfectly limited and known risk, thus even number of bought options as sold.

We can go(take) up the SOIC so with a volatility set at 30 %, 1 year maturity and interest rate set at 5 % for all the options:
- Call purchase 100 - 14.23
- Sale call 110 - 10.02
- Sale call 120 - 6.90
- Call purchase 130 - 4.67

Total debit(flow) = 1.98 (to compare with the naked purchase of the only 100call at 14.23 or of the call spread 100/110 for 4.21)

We can build exactly the same strategy with puts.

Next : Butterfly : A First Attempt
Previous : Iron Condor: A First Approach

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Advanced Strategies - INDEX
Advanced Strategies - CHAPTER I
Advanced Strategies - CHAPTER II
Advanced Strategies - CHAPTER III
Advanced Strategies - CHAPTER IV
Advanced Strategies - CHAPTER V

Strategies Options