DITM Iron Condor

Discussion in 'Options' started by jones247, Aug 12, 2009.

  1. Most strategies involving IC that I've read, assumes OTM or ATM IC spreads. I'm considering DITM Iron Condor spreads on the RUT (or other European Style Options). Perhaps it would be worth doing it with high IV stocks as well. It's seems to be a high probability, low risk trade...

    Any thoughts...


  2. wayneL


    What would DITM do that OTM doesn't do?
  3. Much better risk:reward ratio. Btw... I would enter the DITM IC at least 3 months out or longer... The plan would be to enter a rolling 12 month DITM schedule, starting 3 mths out...

  4. Doesn't sound like a good idea, Deep ITM options don't have alot of time value and they have a very high delta
  5. This strategy may be best right before earnings (even with ICs several months out) because I'm more interested in movement of the underlying asset than the premium. Any benefits derived from time decay would be "icening on the cake".

  6. the high delta would be a benefit for the leg of the IC that's favorable.

  7. wayneL


    Supposing you had the following (say the market is @500)

    -1 580 put
    +1 600 put
    -1 420 call
    +1 400 call

    That's a "DITM IC". I presume that is what you mean.

    But it is synthetically equivalent to:

    -1 580 call
    +1 600 call
    -1 420 put
    +1 400 put

    An OTM IC

    There is no difference 'cept that bid/ask spreads will probably be wider on the DITM version.

    There is no advantage going DITM as opposed to an OTM IC of equivalent strikes.
  8. I agree that your example is snythetically equivalent. The only difference in your example is that with one scenario you'll have a debit (debit spread - Reverse IC), whereas with the other you'll have a credit (credit spread - IC).

    Although the bid/ask spread is wider, typically you'll save on commisions and bid/ask cost with a credit spread, as expiration may preclude the need to enter a closing trade on all four legs.

    Nonetheless, whether or not it's a DITM IC or a DOTM Reverse IC, I believe it's a good risk:reward bet... as long as the asset will have a material movement in either direction.... This is why I would enter the transaction (DITM IC or DOTM Reverse IC) at least 3 months out...

    If there's a major hole in my logic, then I conceed...

  9. no matter the underlying the deep IC is the same position as the far otm IC. The interest / cost to carry is priced in for either case. There is no delta benefit so long as you're not legging the IC.

    SO basically you're asking about buying a IC and hoping the underlying moves enough to make it pay off. The answer is its a crap shoot. IV wont play a huge roll since the IC will have very little vega unless you spread the legs of each side further apart.
  10. wayneL


    Confused :confused:

    So you are long the wings?
    #10     Aug 12, 2009