Iron condor option spreads strategy
As part of an ongoing series of articles I write for Seeking Alpha on the many different option strategies available to traders, this week I will go into the 'Reverse Iron Condor' spread, which is one of the most fascinating option spread trades you can place. The 'reverse iron condor' is made with a net debit instead of a net credit. It is a neutral strategy that can profit when the stock moves up or down. This aspect appeals to many traders.
Another factor that is great about the 'reverse iron condor' is that since it is placed as a net debit, you do not need a higher level options trading account. Most credit spreads require a Level 4 account, and many traders do not have this level yet.
This trade can be placed with most brokers by only having a Level 2 or 3 account. The 'reverse iron condor' is a strategy that appeals to a lot of people who trade options for several reasons. First, the amount of risk is known from the start.
The highest potential of profit on the trade is also known from the start. Therefore, it is a limited risk, limited profit strategy, but also has a higher profit potential than many other spreads. I will show examples of this, as well. For whatever reason, there is little information available on the 'reverse iron condor' spread.
The strategy is widely used by professional traders and it is truly unique from most other option strategies. The relatively small price move needed to profit makes this strategy a great choice under the right circumstances.
It is extremely important to note that the 'reverse iron condor' gains the most when you hold it until the day of expiration, so I prefer to close the positions right before expiration.
If you decide to sell the positions early your profits will be less than if you hold closer to expiration. Under ideal circumstances, however, it is a wise decision to sell early. The 'reverse iron condor' is a complex trade that has four 4 "legs" to it, but is placed as a spread to minimize commission costs. However, you can "leg" into the trade individually. Let's take a look at how the trade is placed.
For explanation purposes, I will use the one 1 contract for each "leg" to simplify the example for understanding the trade. This is a strategy that takes advantage of volatility and modest not massive price swings in a short-time period. It is the opposite of the 'long condor' strategy, which benefits from low volatility. For a list of stocks that currently have weekly options, please see this link here.
I find that when buying the weekly options on extremely volatile stocks, such as the Direxion Financial Bull 3X and the Direxion Financial Bear 3X or other volatile ETF's or stocks, this strategy can work very well when you purchase the contracts on the preceeding Friday.
Hughes Optioneering
Here are a few examples of hypothetical trades using ten 10 contracts for each "leg":. Direxion Financial Bull 3X FAS. This trade expires on December 9, , but these examples can easily be used as a reference for future trades by simply changing the strike prices according to what the security is trading at.
I will use ten 10 contracts for explanation purposes. This is also the maximum amount you can lose on this trade. Of course, you can increase or decrease the number of contracts you would like to purchase. SPDR Gold Trust GLD.
With the 'reverse iron condor spread, you can always move around the strike prices on a trade calculator and decide how you would like to set-up the trade. Earnings Trade Example - Google, Inc. Here, I want to show you a hypothetical earnings trade you can use this strategy for around the time when a company is set to report earnings the best time to buy is the day before the event.
While Google doesn't report their next earnings until mid-January , this example can be used whenever a stock with weekly options has earnings due that particular week. For this trade, I will use the weekly options with a December Week 2 expiration. While you limit your upside gain if a company reports blow-out earnings and estimates and the stock soars or if the stock seriously tumbles after earnings, the 'reverse iron condor' has one thing a 'straddle' or 'strangle' option trade doesn't have: In fact, this can be an extremely safe trade to make around earnings when the options are close to expiration.
Let us see what past history tells us with Google's past five earnings with actual numbers. This would be if we purchased the Google "reverse iron condor' a day in advance of their earnings release and held until expiration at the end of the week:. On October 13, Google reported third-quarter earnings. Here is how the stock moved:.
On July 14, Google reported second-quarter earnings. On April 14, Google reported first-quarter earnings. On January 20, Google reported fourth-quarter earnings.
On October 14, Google reported third-quarter earnings. As you can see, the 'reverse iron condor' would have been successful for the last five trades. Each one had the required move in the underlying stock price to profit, as the chart above showed and the past results proved. You do have to be very selective in what stocks you choose to use the 'reverse iron condor' trade with.
T , Microsoft NASDAQ: MSFT , or any other stock that has such little movement. Another thing to remember is that this opportunity because we are using the earnings as one example only comes around once every three 3 months for a stock, as earnings are reported every three months, four times a year.
Iron Condor Spreads | Iron Condor Strategy - The Options Playbook
The following stocks have consistent movement after earnings and weekly options which can make this trade successful:. I plan to write future articles and trade scenarios when these stocks are reporting earnings. You may ask yourself why you should avoid using long-term options with this strategy? The answer is because the more time the stock has, the better chance it may retrace to the middle strike, which is exactly what we do not want to happen.
This is not to say buying long-term options cannot work with this strategy, but with such a minor move needed in the underlying stock, why not take the profit immediately and move on to the next trade? As I mentioned earlier in the article, I will use the leveraged Direxion ETF's FAS and FAZ for just a weekly trade from time to time.
These are separate from the earnings trade I use. With all that is going on in Europe and the financial mess their dealing with, the Direxion 3X ETF's are even more volatile than usual. It is generally a good idea not to use extremely low-priced stocks or ETF's with this strategy.
Should You Flock To Iron Condors?
S , for example, is a stock that should be avoided even though they have weekly options available. Other securities that I have used this strategy with, as only a weekly trade , are the following:. To summarize, the 'reverse iron condor' spread is a great strategy if you want to know ahead of time what your maximum profit and loss is on a specific trade. If you are looking to capitalize on an extremely large move in the stock price where profits are unlimited, the 'reverse iron condor' may not be what you are looking for.
I hope you found this article interesting and will try the 'reverse iron condor' as a trade. If you have never used it before, I recommend trying it out via "virtual trade" or paper trade. This will give you a head-start when the time comes to place the trade with real money.
I plan to write future articles on this strategy for both the weekly trades and when earnings season is back with the stocks listed above. If you have any questions, please leave them in the comment section or send me an e-mail. I try my best to respond as soon as possible. I am currently long AAPL calls and I trade options daily with several of the above listed stocks.
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