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Short Iron Condor-Neutral Strategy

Options-Trading-Beginners

Explanation

Reverse iron condors are market neutral strategy with no directional bias. For this strategy to breakeven it would require very volatile move in the underlying. Initially, the execution of the strategy involves funds outflow aka net debit and the risk is limited to the amount paid. The strategy can be build at any distance from the stock price and with any size spread between the long and short options. The closer the spread, the more debit will be paid, but the probability is higher that the option will finish in-the-money and vis-a-versa.

It is a complex trade that has four "legs". A reverse iron condor consists of buying an out-of-the-money bull CALL debit spread above the stock price and an out-of-the-money bear PUT debit spread below the stock price with the same expiration date.

Risk:

Max loss is defined and is equal to the net debit taken when entering the trade.

Reward:

Max profit is achieved when the underlying is above or below the short CALL or PUT strike at expiration.

Construction

Sell 1 Deep OTM Call

Buy1 OTM Call

Buy1 OTM PUT

Sell 1 Deep OTM PUT

 Type Expiry Date Strike Price LTP Action No. Of Lots
PUT 25-05-2023 18150 102.7 Buy 1
CALL 25-05-2023 18250 85.75 Buy 1
PUT 25-05-2023 18100 83.85 Sell 1
CALL 25-05-2023 18300 65.5 Sell 1

 

Market Expiry Payoff 1 Payoff 2 Payoff 3 Payoff 4 Net Premium Option PayOff At Expiry
17800.0 350.0 0.0 -300.0 0.0 -39.05 10.95
17850.0 300.0 0.0 -250.0 0.0 -39.05 10.95
17900.0 250.0 0.0 -200.0 0.0 -39.05 10.95
17950.0 200.0 0.0 -150.0 0.0 -39.05 10.95
18000.0 150.0 0.0 -100.0 0.0 -39.05 10.95
18050.0 100.0 0.0 -50.0 0.0 -39.05 10.95
18100.0 50.0 0.0 0.0 0.0 -39.05 10.95
18150.0 0.0 0.0 0.0 0.0 -39.05 -39.05
18200.0 0.0 0.0 0.0 0.0 -39.05 -39.05
18250.0 0.0 0.0 0.0 0.0 -39.05 -39.05
18300.0 0.0 50.0 0.0 0.0 -39.05 10.95
18350.0 0.0 100.0 0.0 -50.0 -39.05 10.95
18400.0 0.0 150.0 0.0 -100.0 -39.05 10.95
18450.0 0.0 200.0 0.0 -150.0 -39.05 10.95
18500.0 0.0 250.0 0.0 -200.0 -39.05 10.95
18550.0 0.0 300.0 0.0 -250.0 -39.05 10.95
18600.0 0.0 350.0 0.0 -300.0 -39.05 10.95

 

Payoff Chart

 

Example

Nifty is trading at 18200 levels and the trader is non-directional on market with bullish on volatility. He implemented short iron condor where he bought and short CALL and PUT options. For implementing this strategy, he short 18100 PUT at a premium of Rs 84, bought 18150 PUT at a premium of Rs. 103, bought 18250 CALL option at premium of Rs. 86 and shorted 18300 CALL option at premium of Rs. 66. Total fund outflow initially comes to Rs. 1950 (103 + 86 – 84 – 66) * 50.

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    Scenario 1:

     If the price of the underlying closes in between the short CALL and PUT options i.e., 18150 to 18250, the resulting trade will end up making loss to trader as shown in table above

    Scenario 2:

    The trader will make profit if the price of the underlying closed beyond the extreme CALL and PUT option. Under such scenario, both long options will expire in-the-money and the trader will be able to make gains to the extent of the spread of short options

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