Okay, obviously i'm unskilled in Iron Condors, but I just for the life of me cannot figure this math out... and its making me nutz 6/28/2010 SPY close @ 107.53 I constructed an Iron condor in AUG BUY 112 CALL @ 1.9 SELL 109 CALL @ 3.35 SELL 106 PUT @ 3.57 BUY 103 PUT @2.68 TOS says max profit to be $232 and nets me $232 from the get go.. and max loss to be $68.. I checked my math and i also came up with $2.32 for the net credit. However, shouldnt an IRON CONDOR have a higher potential loss than the credit it originally nets you? I kept looking over the numbers, and it just doesnt look like i have a high loss potential. If stock went to 100 at expiry, the 106 put would cost me $244(sold@356,buyback600), but the 103 earns me back $32(268buy,300sold). total loss of $212, but the calls end up worthless, So I have a $145 credit on that leg totalling only $68 total LOSS just like TOS Says!!! This cant be right can it? This seems like easy money.. Even if SPY did go to $100 or below, my max loss on that leg is only $212. I could then just close my other leg 109 CALL early for probably pennies still netting about $100 making my overall loss $112 and wait for a bounce back up to make good money on the 106PUT if it becomes worthless... There must be a flaw in my strategy here.. What am I doing/thinking wrong? Is it simply that IV probability estimates that I have no chance in hell of SPY ending between 106 and 109 in august? Because even if it doesnt, I dont see why I cant make some good money on the leg that gets worthless and then just keep the other side for a bounce... I apoligize in advance if i'm missing something extremely easy here.. -Tom
With an Iron Condor as you have constructed, the strikes are $3 apart on both sides. That $3 ($300) is your max loss... So -300 + 232 (credit recieved) = -$68 that is shown in TOS profit chart.
Thanks for the confirmation Shhhh... I dont know why, but for some reason, i've always read IC's have a higher loss potential than profit.. I'm thinking it really has to do with the IV and my super tight 106-109 profit range.. -Tom
The risk/reward of an iron condor depends on how far OTM you go, the further OTM the lower the premium received and the higher the risk, and vice versa.
Yea, i've been putting together numerous scenarios... Looks as though the closest I can set the I.C. to the current price the better (still otm), and incorporating the write and buy on each leg to be successive strikes for best premium gainage... Basically it seems an I.C. can be played very aggressively if Volatility drops off a cliff, or considerably more conservative if IV is thought to remain very high. Given its just 2 vertical spreads, im considering just playing one leg at a time based on where the market is at. Perhaps forming an I.C. at one point with better premium intakes from both sides.. Its probably more aggressive, but still not as risky as me buying single options outright in a high IV environment. I've managed to stay breakeven in the past, but this looks to have a much better risk/reward with high VIX and im kicking myself for not having looked at it sooner.. -Tom
I wouldn't call it "better", unless by "better" you mean that the reward/risk ratio is higher. However, don't forget that the higher the reward/risk ratio the lower the probability of profit.
True.. I dont mind lower probability though if my own opinion has a strong overbought/oversold view.. I've mainly got burned in the past not so much by getting the direction wrong as its not moved ENOUGH to make my put or call profitable due to time decay, IV decay, etc.. Heck, with this I could even be wrong on the direction by a small amount and still collect full proceeds.. I really feel like i was swimming against the current there for a while...
One thought though was always the SPX vs SPY debate.. I like SPX better because my vertical could go deep ITM and I wouldnt have to worry about any exorcisms and simply close it out any time I chose or ride it for the bounce back. (I'm not worried about max loss on a vertical spread) With the SPY it could get excercised if I pick these near OTM legs which i'd rather not have to deal with. Although, it still really shouldnt have any affect on my bottom line..
As long as you stay with options you don't have to worry abour exorcisms. The term is assignment not exorcism.