Reverse Iron Condor Option Strategy
What are the characteristics of this option strategy?
Reverse Iron Condor Option Strategy is an advanced options trading strategy that combines two vertical spreads with a neutral bias. In this strategy, the reverse iron condor trader utilizes both put and call credit spreads within the same options structure, which provides a net credit of premium. The reverse iron condor is a risk-defined strategy, meaning there is a predetermined amount of capital that could be lost on the trade if the market moves against the position without the trader taking any extra risk. This strategy is best utilized when the market is range bound and volatility is low, so it’s most effective when traded during times of low volatility.
Is this a bullish, bearish or neutral strategy?
The Reverse Iron Condor Option Strategy is a neutral strategy. The trader is expecting the underlying security to stay within a predefined range so no matter what direction the market moves, the trader’s positions should be profitable. This strategy allows the trader to take advantage of the underlying security staying within a relatively narrow range, regardless of its direction.
Is this a beginner or an advanced option strategy?
The Reverse Iron Condor Option strategy is an advanced strategy and is not recommended for beginner options traders. The thought process behind this strategy is complex and requires a deep understanding of options trading and the markets in order to successfully execute this strategy.
In what situation will I use this strategy?
This strategy is best used when the markets are not expected to make large, sustained price moves and are instead range-bound with low volatility. In these situations, the Reverse Iron Condor Strategy provides the trader with a relatively low risk opportunity to capitalize on various market condition.
Where does this strategy typically fall in the range of risk-reward and probability of profit?
The Reverse Iron Condor Option Strategy typically offers a lower risk and better probability of profit compared to other complex option strategies. This strategy usually has a reward-to-risk ratio of less than 1. Most of the profits from this strategy will come from collecting the net credit of premium at the beginning of the trade, as the probability of profitability for the remainder of the trade will be relatively low.
How is this strategy affected by the greeks?
The greeks affect this strategy in a variety of ways. Since the Reverse Iron Condor Option Strategy falls in the category of neutral option strategies, the primary greeks that are affected are delta, vega, and theta. Delta measures the change in the option’s price due to a change in the underlying asset’s price, while vega measures the change in an option’s price due to a change in volatility. Theta measures the time decay of an option, so a high theta in this strategy indicates that the trader should have a higher probability of success.
In what volatility regime (i.e VIX level) would this strategy be optimal?
The Reverse Iron Condor Strategy is best utilized when the VIX level is low and the markets are range-bound. When the VIX is high, the strategy may still be profitable, but the probability that the trader will be successful is decreased.
How do I adjust this strategy when the trade goes against me? And how easy or difficult is this strategy to adjust?
Adjusting the Reverse Iron Condor strategy when it goes against the trader is relatively simple but can be a bit tricky. The primary adjustment that can be done is to roll the spreads to a higher or lower strike price while keeping the same expiration date. This will, however, affect the probability of profit and can become complicated to adjust properly. Some traders have been known to double down on their positions as well and will simply adjust the spreads to better suit their risk/reward profile.
Where does this strategy typically fall in the range of commissions and fees?
The commissions and fees associated with the Reverse Iron Condor Strategy can vary depending on the broker and the size of the trade. Generally speaking, the strategy is reasonably priced in terms of commissions and fees, especially if the trader is trading multiple contracts at a time.
Is this a good option income strategy?
Yes, the Reverse Iron Condor strategy can be a good strategy for generating income for experienced options traders. This strategy is typically used in correlation with other strategies, such as trend following and breakouts, in order to maximize profits from the markets.
How do I know when to exit this strategy?
When trading the Reverse Iron Condor strategy, it is best to exit the trade when the underlying security reaches one of the breakeven points, as this maximizes the probability of the trade being profitable. Traders should also have an exit plan before entering a trade, so they know when to exit when the trade goes against them.
How will market makers respond to this trade being opened?
Market makers will typically respond to the Reverse Iron Condor strategy by adjusting the quote of the option. This is done in order to offset any gains they may suffer due to the reverse iron condor strategy being opened.
What is an example (with calculations) of this strategy?
Assuming MSFT is trading at $285, an investor can create a Reverse Iron Condor Option Strategy by simultaneously buying and selling four options, consisting of both call and put credit spreads, with different strike prices and expiration dates.
To execute this strategy, the investor would do the following:
Sell one out-of-the-money call option with a strike price of $295 and an expiration date of one month from now, receiving a premium of $5 per share.
Buy one out-of-the-money call option with a strike price of $305 and an expiration date of one month from now, paying a premium of $2 per share.
Sell one out-of-the-money put option with a strike price of $275 and an expiration date of one month from now, receiving a premium of $4 per share.
Buy one out-of-the-money put option with a strike price of $265 and an expiration date of one month from now, paying a premium of $1 per share.
The resulting payoff diagram of this strategy will look like a condor, but with the wings (the short options) positioned at the center, and the body (the long options) positioned at the wings.
Here’s how the strategy works:
If MSFT’s price remains within the range of $275 to $295 by the near-term expiration date, the near-term call and put options will expire worthless, and the investor will keep the premiums received from selling those options.
If MSFT’s price rises above $295 or falls below $275, the investor will profit from the long call or put options, respectively, but lose money on the short call or put options, respectively, resulting in a limited profit potential.
If MSFT’s price moves too far in either direction, the investor may experience losses.
How MarketXLS Can Help?
MarketXLS is a powerful financial analysis and trading tool that can be used to analyze and trade the Reverse Iron Condor Strategy. With MarketXLS, traders can quickly analyze the greeks of their trades and determine the best setup for their strategy. MarketXLS also offers a wide range of built-in option strategies, making it easy for traders to analyze and backtest their strategies before executing them. MarketXLS can be used to quickly automate the entire trading process for the Reverse Iron Condor Strategy, allowing traders to spend more time researching and executing trades instead of manually analyzing them.
Here are some templates that you can use to create your own models
Reverse Iron Condor Spread
Reverse Iron Albatross Spread
Search for all Templates here: https://marketxls.com/templates/
Relevant blogs that you can read to learn more about the topic