Options Trading Strategies: Short Iron Condor
A short iron condor is a four legged strategy and is created by buying one lower strike Out of The Money put, selling Out of The Money put with a higher strike, selling one Out of The Money call with even higher strike, and buying 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 short iron condor as a combination of an Out of The Money bull put spread and an Out of The Money bear call spread.
When to trade this strategy?
You are neutral on the market movement and bearish on the volatility so you expect a minimal BTC/ETH price change in the specified time and looking to collect a premium in a low risk trade.
Below is a Profit and Loss chart example of a short iron condor options strategy:
Pros:
Capped and low maximum loss.
Cons:
The higher profit potential requires a narrow range between the wing strikes.
Example:
In this example, BTC is trading at 37,150.61 USD and you expect its price to moderately move in either direction. You have bought an OTM put with a strike price of 34,000.00 USD, sold an OTM put with with a strike price of 36,000.00 USD, sold an OTM call with a strike price of 38,000.00 USD, and bought an OTM call with a strike price of 40,000.00 USD, all with an expiration date of February 11th 2022.
As this is a credit spread you have received a net premium of 1,153.20 USD, which is also your maximum profit.
The Profit and Loss chart is given below:
Upon expiration:
If the BTC price is below the lowest strike price (OTM long put), then both calls expire worthless, but the long OTM put is exercised and the short OTM put is assigned. As a result, BTC is sold at the lowest strike (OTM long strike) and purchased at the higher strike (OTM short put strike). This is your maximum loss which is equal to the difference between adjacent wing strikes minus the premium you have received.
If the BTC price is above the strike price of the long OTM put, but below the strike price of the short OTM put, you are in the profit if the BTC price is above the first break even price.
If the BTC price is between the strike prices of the short OTM put and short OTM call, then all options expire worthless, and this is your maximum profit.
If the BTC price is above the strike price of the short OTM call, but below the strike price of the long OTM call, you are in the profit if the BTC price is below the second break even price.
If the BTC price is above the strike price of the long OTM call, then both puts expire worthless, but the short OTM call is assigned and the long OTM call is exercised. This means that BTC is sold at the lower and purchased at the higher strike, and this is again your maximum loss.
| BTC at Expiry (USD) | Payoff (USD) |
|---|---|
| 34,000.00 (strike price LP OTM) | -846.80 (max loss) |
| 34,356.00 | -490.80 |
| 34,846.80 (break even 1) | 0 |
| 35,462.00 | +615.20 |
| 36,000.00 & 38,000.00 (SP OTM, SC OTM) | +1,153.20 (max gain is between strikes) |
| 38,601.00 | +552.20 |
| 39,153.20 (break even 2) | 0 |
| 39,561.00 | -407.80 |
| 40,000.00 (strike price LC OTM) | -846.80 (max loss) |