Reverse Iron Condor Spread

Discussion in 'Options' started by kjb1891, Feb 2, 2009.

  1. kjb1891


    I was wondering if anyone has had any experience with using reverse iron condor spreads at all? I've been trying to learn more about this particular spread, but I can't find a whole lot of information about it.

    It's a volatility spread that is identical to buying a bull call spread and a bear put spread with the same expiration on the same underlying. Or you can also see it as buying a strangle and selling a further OTM strangle as well.

    It just seems to me that this spread has a pretty decent risk:reward profile if used in the best manner. I'm just not sure what the best strategy is with this spread such as what is the best type of underlying to use it on, when to use it, and how much time to go with.

    Any inputs, insights, experiences, and/or opinions?

    PS - Here's a link to's page about reverse iron condors for more info:
  2. kjb1891,

    Yes, I have done them before. Funny you should mention them as I agree they are rarely ever talked about.

    In general, I think they are best for when a stock is not likely to stay in a range for a long time and then you do this spread with quite a bit of time left - remember that just like with a straddle you can do a "time" stop loss.

    An example of what I did was when NOV was around $80 (Pre-split now I think - this was back in 07 I think), I did 90/100 Bull Call Spread and the 70/60 Bear Put spread. If possible, personally, I like going a bit closer on the put side (not that this example was). Later, NOV went to around $115 range and I closed for a proft.

    However, there are some pitfalls -
    1. 4 Bid/Ask spreads (buying and selling)- this can add up quite a bit - I would only consider these on options that have solid b/a spreads.
    2. Limited profits - Of course, only one side can go to full value at a time - of course, a person could consider holding the other side in case of an extreme reversal, but it's not likely. In general, if you pay $600 for a 10 point spread on each side, you know you are limited to $400 max profit.
    3. Hard to know when to take profits - in my example, there was about a month left on my options, and I was risking it falling below $100 again, so I closed out, but there was still some time values left in the short positions, so I didn't make as much as I could have if I had waited it out.

    On the other hand, compared to a straddle/strangle, these can:
    1. Cost less money up front.
    2. Have better break-even at expiration points (yes I know, that's only at expiration).
    3. Have the same % gain with smaller moves or even turn what would have been a small loss with a straddle/strangle into a small gain.

    Just as example for anyone reading:
    Stock - $90
    100 Call - $800
    110 Call - $520
    90 Put - $800
    80 Put - $520
    Lets say the options are about 4-6 months out.
    Strangle would cost $1600
    Reverse LIC - $1600-1040 = $560
    Stock at 107 @ expiration:
    Strangle = $700 = $900 loss
    RLIC = $700 = $140 gain

    Again, this is a very pro-RLIC example and only good at expiration.

    I think most people don't trade these because people who do trade straddles don't like the idea of limiting their gains.

    In general, if I am looking for a candidate for doing this with I look for:
    1. Stock that I don't see being exactly where it is 4-6 months from now.
    2. Good Bid/Ask spread and liquid obviously.
    3. Enough value in the farther out of the money options to make it worthwhile to sell those - if the options in the example above that were sold only brought in say $330, now you wouldn't want to do that.
    4. It's OK IMO if earnings is coming up as long as you don't expect IV for 4-6 months out to get crushed - earnings can make the stock move quite a bit. If earnings just came a bit ago and IV is low that is OK as well.
    5. Normally I would only do this with higher-priced stocks and use 10 point spreads on stocks over $50 and maybe 5 on stocks from 25-49. I guess a person could consider 2.5 point spreads on lower priced stocks.

    I would normally look to close this position with somewhere around 1 month left, though it probably depends on the IV of the stock as well. In general, you would like to keep any loss to 50% at least, as your gains aren't expected to be huge.

    Also, I would consider closing the position anytime you have a decent gain such as 25-40% depending on your goal. Remember that the most you can ever make will be limited anyways.

    One more point - if the side that is almost worthless truely isn't worth selling then I would keep it, but if it adds to the gains much at all, I would sell as it is very unlikely to do any good. For example, if you paid $600 for this and can now sell the Call spread for $800, but the put spreads only bring $5, not worth selling IMO, but if they still bring say $40, then I'd probably sell.

  3. Kib,

    I recognize this is not an answer to your question, yet I must ask:

    Why do you think this spread has a 'pretty decent r/r profile' when you don't know

    a) What type of underlying to use

    b) When to use it

    c) How long to hold it (or is it which expiration date to use?)

    d) The best 'manner' to use it.

    When trading options it really is very important that you <i>understand</i> what you are doing, what you hope to achieve, and what has to happen for you to earn your profit.

    If you choose to forgo that learning part, you cannot do well over the longer term.

  4. spindr0


    You want a stock that's going to move toward the outside stock in your time frame and likely to maintain it's IV or increase.

    In general, it's not a great strategy since you have slippage on 4 legs and require significant movement. If you want to get a bit more entertaining, take a look at reverse diagonalizing these and use them just before earnings announcements where all months have significantly higher IV than HV and have contracted post EA in the past. Yes, you're on the short end of that skew but the ratioing offsets that.

    And always remember that you can support a position by adding some long or short stock to lock in gain or prevent further loss. This is particularly useful in the pre and after market when your stock is moving but the options aren't trading.
  5. kjb1891


    Hi Mark. I said in my OP I couldn't find much good info about this spread. That's why I was asking some questions here to try and learn more about them.

    Sorry, I didn't specify well enough about what I meant about "how much time to go with". I meant how much time until expiration not how long to hold the trade for.
  6. kjb1891


    Hey thanks. That's a lot of good info.

    So, use it for stocks that have more liquid options when you expect the stocks actual price movement to increase along with a stable or rising IV. Sounds good to me. Basically you want to treat a RIC much like you would a straddle/strangle trade correct?

    I wonder though, if you're good at timing long volatility trades, would you almost want to just stick with plain straddles/strangles then? Essentially your downside risk on the losing side of the trade is 100%, but then the winning side has unlimited potential gain.

    If you put on a RIC you'd be capping you're loses on the losing side, but you'd also be capping your potential gains on the other.

    Not to mention that long straddles/strangles would have less commissions and slippage cost compared to RIC's as well.

    Hmmm...I'm just thinking out loud. I have to stop that. :D
  7. I vote that you keep thinking out loud.

  8. spindr0


    If you're good at timing, you can do just about whatever you want :)

    I think that a lot of people look at a strategy and choose it because of certain characteristics. In isolation, that's fine. But I think that the big picture is to determine your outlook and select the strategy that performs best in such circumstances. It's also important to know in advance what you're going to do when your outlook doesn't materialize because IMHO, adjustments and money management are as important, if not more important than the opening position's execution.

    As for straddles and strangles versus condors and exotic spreads, it's not a question of which is better but which one you trade better with.
  9. Hi Spin,

    I couldn't agree more that managing money and risk is <i>the</i> key to being a successful trader. Also it's the trader that makes the strategy work, not the strategy, by itself, that earns profits.

    But you and I are at opposite ends of the spectrum when it comes to trading with a market outlook. You place a great deal of emphasis on it, and have proven that your outlook is good enough to keep you in the green. And I know that most traders believe they have a good opinion when it comes to prognostication.

    I trade with [CORRECTED. Hat Tip stevegee] as little bias as possible and find it works well enough for me to earn a living.

    Options truly are versatile and very different types of traders and investors can profit by using them wisely.

  10. You meant you trade *with* as little bias as possible right?
    #10     Feb 3, 2009