Iron Condor - Maximum loss

Discussion in 'Options' started by moolah, Oct 10, 2017.

  1. moolah

    moolah

    I am new to this strategy and would like to know how maximum loss is calculated when a trade is initiated.

    I do know maximum profit is the money you get if all four legs expire worthless / without being exercised.
     
  2. JackRab

    JackRab

    max value is the strike difference, so max loss is that minus the credit you received (if sold).
     
  3. moolah

    moolah

    Hi JackRab, thanks for your reply. Care to give an example?
     
  4. JackRab

    JackRab

    wait... let me finish my sushi first
     
    moolah likes this.
  5. JackRab

    JackRab

    Okay.. say 100 straddle = 10 and the 95-105 strangle = 6... if you sell the IC, you receive 4.

    This is your max gain with expiry at 100

    Max loss is on or outside the strangle limits. So, expiry at 95 means the 100 put is 5, the rest of the legs = 0.
    Expiry at 105 means the 100 call = 5 and the rest =.
    Expiry <95 or >105 means that the max value stays 5... At 94: 100 put = 6 and 94 put = 1, value 5.. etc.

    So total loss at max = 5-4(credit)=1
     
  6. moolah

    moolah

    Hmm...so for an iron condor context, maximum loss is essentially when the market turns against me and either the 2 CALL legs or the 2 PUT legs get triggered?
     
  7. European options the max loss is the width of the spread minus the credit. American can be a bit more tricky if there is a dividend involved. Most brokerage houses have quantitative iron condor finders. You might want to play with your brokers platform and see if you tee up an IC.
    Both Schwab and TOS have finders. Schwab's is on StreetSmartEdge.
     
  8. JackRab

    JackRab

    Since you want the expiry to be at exactly the short straddle... anything away from that means less profit.

    It's unlikely that the expiry is exactly on that strike... so probably at least 1 leg will be exercised/triggered. Max is indeed at or beyond the 2nd leg...
     
  9. Robert Morse

    Robert Morse Sponsor

    IMO, max profit is never the theoretical max. No one lets these spreads go to expiration, even with cash settled indexes. There is a point you will want to exit. You should figure that in to educe your max.
     
  10. moolah

    moolah

    But is my understanding correct, in an iron condor context, maximum loss is essentially when the market turns against me and either the 2 CALL legs or the 2 PUT legs get triggered
     
    #10     Oct 11, 2017