Options Trading Strategies: Long Iron Condor
A long iron condor is a four legged strategy, and is created by selling one lower strike Out of The Money put, buying Out of The Money put with a higher strike, buying one Out of The Money call with even higher strike, and selling one Out of The Money call with the highest strike. All options are with a same expiration date and there is an equal distance between each strike. The underlying price is between the middle strikes.
You can look at a long iron condor as a combination of a bull put spread and a bear call spread.
When to run this strategy?
You are neutral on the market movement and bullish on the volatility so you are expecting a BTC/ETH price movement outside the range of the highest and lowest strike price, and want to earn a profit if the BTC/ETH makes a drastic move in either direction.
Below is a Profit and Loss chart example of a long iron condor options strategy:
Pros:
Maximum loss is capped. Relatively high profit probability if the underlying price moves in either way.
Cons:
The higher profit potential comes with a wider range between the middle strikes, which widens the spread lowering your probability for profit. The amount of the potential loss can be bigger than the amount of the potential profit.
Example:
In this example, BTC is trading at 37,160.90 USD, and you expect its price to dramatically move in either direction. You have sold an OTM put with a strike price of 35,000.00 USD, and bought an OTM put with with a strike price of 36,000.00 USD, bought an OTM call with a strike price of 38,000.00 USD, and sold an OTM callwith a strike price of 39,000.00 USD, all with an expiration date of February 1st 2022.
As this is a debit spread you have paid a net premium of 137.19 USD, which is also your maximum loss.
The Profit and Loss chart is given below:
Upon expiration:
If the BTC price is above the OTM short put strike and below the OTM long put strike price, as long as the BTC price ends up below the first break even price, you will realize profit.
If the BTC price ends up between the OTM long put strike and the OTM long call strike (two middle strikes), all the options expire worthless and the result is your maximum loss which is equal to the premium you have paid for this position.
If the BTC price is above the OTM long call strike and below the OTM short call strike, as long as the BTC price ends up above the second break even price, you will realize profit.
If the BTC price is below the OTM short put strike and above the OTM short call strike, one of the spreads of the long iron condor expires fully In The Money, resulting in your maximum profit which is equal to the difference between adjacent wing strikes minus the net premium.
| BTC at Expiry (USD) | Payoff (USD) |
|---|---|
| 35,000.00 (strike price SP OTM) | +862.81 (max gain) |
| 35,466.00 | +396.81 |
| 35,862.81 (break even 1) | 0 |
| 35,943.00 | -80.19 |
| 36,000.00 & 38,000.00 (LP OTM, LC OTM) | -137.19 (max loss is between strikes) |
| 38,077.00 | -60.19 |
| 38,137.19 (break even 2) | 0 |
| 38,535.00 | +397.81 |
| 39,000.00 (strike price SC OTM) | +862.81 (max gain) |