Short Iron Condor

 

Description         

 

The Short Iron Condor another volatility strategy and is the opposite of a Long Iron Condor, which is a rangebound strategy.

 

The Short Iron Condor differs from the Short Iron Butterfly in that the middle strikes are separated.

            

Short iron condors are not particularly popular because they produce a net debit and offer very small returns compared to straddles and strangles with only slightly less risk.

            

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.

 

Market Opinion

 

Direction neutral.

 

P/L

 

 

 

 

 

 

 

When To Use

 

Use this strategy when you anticipate increased volatility in a stock price, in either direction, and want to make a capital gain.

 

Example

 

XXXX is trading at $52.87 on May 14, 2011.

Sell August 2011 45 strike put for $1.88.

Buy August 2011 50 strike put for $3.73.

Buy August 2011 55 strike call for $4.70.

Sell August 2011 60 strike call for $3.02.

 

Net debit: premiums bought minus premiums sold = $3.53.

 

Benefit

 

The benefit is that for a small capital outlay you have the possibility of profiting from a rangebound stock, with capped risk.

 

Risk vs. Reward

 

The risk is the net debit you paid. The reward is the difference between adjacent strikes minus the net debit.

 

Net Upside

 

Difference in adjacent strikes minus net debit.

 

Net Downside

 

Net debit paid.

 

Break Even Point

 

Break even up:  middle long call plus net debit.

 

Break even down: middle long put strike minus net debit.

 

Effect Of Volatility

 

Positive, unless the stock moves outside of the outer strikes.

 

Effect Of Time Decay

Negative, because you have to wait for a big movement in the stock price.

 

Alternatives Before Expiration

 

You can unravel before expiration.

 

Alternatives After Expiration

 

Close out the trade by selling the options you bought and buying back the options you sold.