Let’s Continue our Knowledge series on Option Trading Strategies. In the previous articles we were discussing Delta Neutral or Non Directional Option Strategies to Capitalize the Sideways or consolidating Phase of the Market.
Do check out that article on Short Straddle and Iron Fly to get familiar with the most widely used Non Directional Strategies in the Market.
In this article we will be discussing Short Iron Condor, which is a combination of Two Credit Spread Strategies. A Bear Call Spread and a Bull Put Spread.
These two strategies when combined together make a Short Iron Condor. Let’s try to understand Iron Condor in the simplest way, a Short Iron Condor consists of a Call Side Credit Spread and a Put Side Credit Spread. As we know the main motive behind non directional strategies is to pocket the theta value of the option premium when the market is in a sidewise trend. In Short Straddle and Iron Fly we targeted to capture the maximum theta value by selling ATM Call and Put Options.
One major concern of the Short Straddle and Iron Fly is the comparatively narrow breakeven points or shorter profitability range. Even Though both Short Straddle and Iron Fly could offer a higher max profit, the profitability range is narrow in both cases which necessitates that our analysis of the consolidation zone of the market.
To be much more precise. Otherwise the market would move outside the Breakeven points of a Short Straddle or an Iron Fly and result in loss on the trade. In a Short Iron Condor we prioritise having a larger profit zone and moderate profits, to have a wider profitability range the theta values of OTM Call and Put Options are targeted in this trade rather than going for ATM Options.
A Short Iron Condor is a Four Leg Non Directional Option Strategy Consisting of an OTM Call Option Sell, an OTM Put Option Sell along with Far OTM Call and Put Option Buy legs to Hedge the sell legs.
The OTM Sell Legs are chosen with our view of a wide range within which we expect the market to consolidate by the expiry. If we expect a short term consolidation in the market within a wider range with slight volatility, then in such cases Iron Condor Strategy can be used to fetch conservative returns from the market.
The Key Parameters of a Short Iron Condor Strategy is as follows,
Max Profit = Net Credit = Net Premium Collected
Upper Break Even = Call Sell Strike + Net Credit
Lower Break Even = Put Sell Strike – Net Credit
Max Loss on Upper/ Call Side = Call Side Spread – Net Credit
Max Loss on Lower / Put Side = Put Side Spread – Net Credit
The Below Payoff Graph will help you to understand the Short Iron Condor
Let’s Consider the Nifty is at 17350, based on our analysis and observation of the market and local economic conditions we didn’t expect a large move in the market.
We expect the market to expire a range of 17550 and 17150 for the weekly expiry. With that view in mind we sell a 17550 Call Option for a Premium of 50 points and 17150 Put Option at a premium of 50 points.
To Hedge the sell leg positions we Buy an OTM Call Option at 17700 for a premium of 20/- Rs and a 17000 Put at 25/- Rs Premium. The Buy Leg hedge positions overall resulted in 45 points Debit, whereas the Sell Leg Positions collected a Premium of 100 Points.
Thus the overall trade resulted in a Net Credit of 55 Points, thereby Making Short Iron Condor a Net Credit Strategy.
The Maximum Profit of the Trade is the Net Premium Collected which is 55 Point , 55 x 50 = 2750/- Rs per lot, If the market expires anywhere in between the selling strikes of 17550 CE and 17150 PE the total premium collected can the pocketed and the max profit of the trade can be made.
As we collected a Net Premium of 55 points, if the market moves even 55 points above the Call Sell Strike, the trade would not result in any loss. Thus the Upper break even is 17550 + 55 = 17605.
Similarly even if the market falls by 55 points below the Put Sell Strike, the overall trade will be safe, so the lower breakeven point becomes 17150 -55 = 17095. So the Overall Profit Range of the Trade is between 17095 and 17605, which is nearly 510 points and a fair enough range for a weekly expiry.
The Upper break even of the trade is at 17605 and our Call Buy leg is at 17700, if the market moves above 17605 the overall position will enter into loss. On the Call side there is a 95 points gap between the Sell leg and Buy leg, which results in a max loss of 95 x 50 =4750/- on the call side. Similarly the lower Breakeven Point is at 17095 and Put buy leg is at 17000. If the market falls below 17000 the trade will incur loss, with a max loss of 95 points on the put side equivalent to 4750/- Rs.
The Short Iron Condor gives a conservative Profit on a wider range if the market consolidates within the range. The chances of success of the trade is high in an Iron Condor, but when the market becomes trending and makes directional moves, it will result in a higher loss owing to the low risk to reward ratio it has. So Proper Risk management is essential while executing the Trade.
| Put Side P/L | Put Buy Leg Premium | Put Sell Leg Premium | Put Buy Leg IV | Put Sell Leg IV | Nifty Spot at Expiry | Call Sell Leg IV | Call Buy Leg IV | Call Sell Leg Premium | Call Buy Leg Premium | Call Side P/L | Combined P/L of Short Iron Condor |
| -6250 | -25 | 50 | 300 | 450 | 16700 | 0 | 0 | 50 | -20 | 1500 | -4750 |
| -6250 | -25 | 50 | 250 | 400 | 16750 | 0 | 0 | 50 | -20 | 1500 | -4750 |
| -6250 | -25 | 50 | 200 | 350 | 16800 | 0 | 0 | 50 | -20 | 1500 | -4750 |
| -6250 | -25 | 50 | 150 | 300 | 16850 | 0 | 0 | 50 | -20 | 1500 | -4750 |
| -6250 | -25 | 50 | 100 | 250 | 16900 | 0 | 0 | 50 | -20 | 1500 | -4750 |
| -6250 | -25 | 50 | 50 | 200 | 16950 | 0 | 0 | 50 | -20 | 1500 | -4750 |
| -6250 | -25 | 50 | 0 | 150 | 17000 | 0 | 0 | 50 | -20 | 1500 | -4750 |
| -3750 | -25 | 50 | 0 | 100 | 17050 | 0 | 0 | 50 | -20 | 1500 | -2250 |
| -1250 | -25 | 50 | 0 | 50 | 17100 | 0 | 0 | 50 | -20 | 1500 | 250 |
| 1250 | -25 | 50 | 0 | 0 | 17150 | 0 | 0 | 50 | -20 | 1500 | 2750 |
| 1250 | -25 | 50 | 0 | 0 | 17200 | 0 | 0 | 50 | -20 | 1500 | 2750 |
| 1250 | -25 | 50 | 0 | 0 | 17250 | 0 | 0 | 50 | -20 | 1500 | 2750 |
| 1250 | -25 | 50 | 0 | 0 | 17300 | 0 | 0 | 50 | -20 | 1500 | 2750 |
| 1250 | -25 | 50 | 0 | 0 | 17350 | 0 | 0 | 50 | -20 | 1500 | 2750 |
| 1250 | -25 | 50 | 0 | 0 | 17400 | 0 | 0 | 50 | -20 | 1500 | 2750 |
| 1250 | -25 | 50 | 0 | 0 | 17450 | 0 | 0 | 50 | -20 | 1500 | 2750 |
| 1250 | -25 | 50 | 0 | 0 | 17500 | 0 | 0 | 50 | -20 | 1500 | 2750 |
| 1250 | -25 | 50 | 0 | 0 | 17550 | 0 | 0 | 50 | -20 | 1500 | 2750 |
| 1250 | -25 | 50 | 0 | 0 | 17600 | 50 | 0 | 50 | -20 | -1000 | 250 |
| 1250 | -25 | 50 | 0 | 0 | 17650 | 100 | 0 | 50 | -20 | -3500 | -2250 |
| 1250 | -25 | 50 | 0 | 0 | 17700 | 150 | 0 | 50 | -20 | -6000 | -4750 |
| 1250 | -25 | 50 | 0 | 0 | 17750 | 200 | 50 | 50 | -20 | -6000 | -4750 |
| 1250 | -25 | 50 | 0 | 0 | 17800 | 250 | 100 | 50 | -20 | -6000 | -4750 |
| 1250 | -25 | 50 | 0 | 0 | 17850 | 300 | 150 | 50 | -20 | -6000 | -4750 |
| 1250 | -25 | 50 | 0 | 0 | 17900 | 350 | 200 | 50 | -20 | -6000 | -4750 |
| 1250 | -25 | 50 | 0 | 0 | 17950 | 400 | 250 | 50 | -20 | -6000 | -4750 |
| 1250 | -25 | 50 | 0 | 0 | 18000 | 450 | 300 | 50 | -20 | -6000 | -4750 |
| 1250 | -25 | 50 | 0 | 0 | 18050 | 500 | 350 | 50 | -20 | -6000 | -4750 |
| 1250 | -25 | 50 | 0 | 0 | 18100 | 550 | 400 | 50 | -20 | -6000 | -4750 |
| 1250 | -25 | 50 | 0 | 0 | 18150 | 600 | 450 | 50 | -20 | -6000 | -4750 |
As all Non Directional Strategies which focus to capture the maximum theta value in the Premium, Iron Condor also could give better returns on a moderately high vix market conditions, In such cases it could offer a wider breakevens and higher returns.
In our Option Strategy Adjustment series, we will discuss the possible Trade adjustments we can make in an Iron Condor if the market moves against our trade, so as to minimize the loss potential of the trade.
Hope you have got a fair idea of the Short Iron Condor Strategy, we will discuss some of the simple and predominant Option Strategies used in the market which could fetch good returns for a disciplined trader.
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