What are the characteristics of this option strategy?
Ratio condor spreads are range-bound, four-legged positions built from both calls and puts. The trade sells options near the money and buys further out-of-the-money calls and further out-of-the-money puts as protective wings to form the condor. When every short option is covered one for one by a long wing, the risk is limited to the width between the strikes minus the credit received from selling the options. When more options are sold than are bought, the position is net short options, the wings no longer cover the shorts, and the loss on the uncovered side is uncapped rather than limited. This strategy is used when the investor believes a sharp upward or downward movement of the underlying stock is unlikely.
Is this a bullish, bearish or neutral strategy?
This is a neutral strategy. The investor expects the price of the underlying stock or index to remain relatively stable during the life of the option.
Is this a beginner or an advanced option strategy?
This is an intermediate/advanced option strategy. It requires knowledge of options and a good understanding of option pricing and implied volatility of the underlying security.
In what situation will I use this strategy?
The Ratio Condor Option Strategy is typically used when the investor believes that the underlying security will not have a large price movement. This strategy may also be used when the investor believes that implied volatility of the underlying security will decrease in the near future. The goal of the Ratio Condor Option Strategy is to benefit from a decrease in implied volatility while still having some upside exposure.
Where does this strategy typically fall in the range of risk-reward and probability of profit?
The risk-reward on the Ratio Condor Option Strategy is skewed towards risk, not reward. With the wings bought one for one, the risk is defined, but the amount at risk is larger than the credit collected: in the example below the credit is $4.00 and the maximum risk is $6.00. What the trade buys with that trade-off is a high probability of a small win, typically quoted at 70%-90% depending on the underlying conditions of the stock or index. One loss can erase the credit from several winning cycles.
How is this strategy affected by the greeks?
The greeks of a Ratio Condor Option Strategy can be both positive and negative. The delta, which measures the rate of change of the option value in relation to the price of the underlying stock, is typically negative for the short options and positive for the long options in the Ratio Condor strategy. Similarly, the vega, which measures the change in option value in relation to a change in implied volatility, is typically negative for the short options and positive for the long options.
In what volatility regime (i.e VIX level) would this strategy be optimal?
The Ratio Condor Option Strategy works best in low volatility environments. When the implied volatility is low, there is less chance of a large price movement in the underlying stock or index, thus increasing the probability of success for the Ratio Condor Option Strategy.
How do I adjust this strategy when the trade goes against me? And how easy or difficult is this strategy to adjust?
Adjusting the Ratio Condor Option Strategy can be difficult. If the position is going against the investor, it is best to exit the position and take the loss. The strategy can be adjusted by changing the strike prices and number of options, however this can be difficult and time consuming.
Where does this strategy typically fall in the range of commissions and fees?
The commissions and fees associated with the Ratio Condor Option Strategy are typically higher than with other option strategies due to the multiple transactions required to enter and exit the position.
Is this a good option income strategy?
The Ratio Condor Option Strategy is a credit strategy, so it can be run for income when used correctly. The main goal is to benefit from a decrease in implied volatility in the underlying stock, while still having some chance of success if the price of the underlying stock moves up or down. The income is not steady, though: the credit is small relative to the loss on a strike breach, so a single move through a short strike can take back the premium from several prior cycles. Buy the long wings every time, because a position that is left net short options has no cap on its loss at all.
How do I know when to exit this strategy?
The best time to exit the Ratio Condor Option Strategy is when the price of the underlying stock begins to move in a strong direction. This can be monitored with the help of technical analysis tools or price alerts. It is best to exit the strategy when the price of the underlying stock reaches the break-even point or when the delta of the options are approaching 0.
How will market makers respond to this trade being opened?
Market makers will usually take the other side of the Ratio Condor Option Strategy. They will typically execute the opposite direction of the trade and attempt to hedge their exposure.
What is an example (with calculations) of this strategy?
An example of the Ratio Condor Option Strategy is as follows: An investor expects a limited upside or downside movement of a stock, MSFT and opens the following position: Sell one 270 strike Put for $5.20 and buy one 260 strike Put for $3.20, then sell one 280 strike Call for $4.80 and buy one 290 strike Call for $2.80. The two short strikes must be different for the position to be a condor rather than a butterfly, and each short strike is covered by a long wing 10 points away.
The net credit is $4.00 per share, or $400 for the position: $5.20 plus $4.80 received, less $3.20 plus $2.80 paid. That $400 credit is the maximum reward, and it is kept in full only if MSFT finishes anywhere between the two short strikes of $270 and $280 at expiration. The maximum risk is the $10 wing width less the $4.00 credit, which is $6.00 per share or $600, and it is reached if the stock finishes at or below $260 or at or above $290. The break-evens are $266 on the downside ($270 less the $4.00 credit) and $284 on the upside ($280 plus the $4.00 credit).
MarketXLS
Marketxls is a comprehensive financial tool that can help you make the most out of your options trading. It provides a comprehensive options selection tool to help you select the right options, analyze different option strategies and identify the best one for you. Marketxls is also equipped with real-time data coverage, charting solutions and technical analysis tools to help you make informed decisions. With Marketxls, you have access to the latest options prices, market volatility, and order types. With its intuitive interface, you can quickly and easily manage your options strategies including the Ratio Condor Strategy.
Here are some templates that you can use to create your own models
Search for all Templates here: https://marketxls.com/templates/
Relevant blogs that you can read to learn more about the topic
ITM Options: A Strategic Investing Tool
2 Leg Option Strategies
Option Strategies For Professional Traders
The Benefits of Using Call Credit Spreads for Trading
Short Strangle vs Iron Condor: A Comparison Guide