IRON CONDOR (IC)

If Short Strangle’s margin and unlimited loss potential is too much for you then the Iron Condor option strategy could be a perfect fit for you. It's not as complex as it sounds

A thread 🧵

#options #trading

1/ Big Brother of Short Strangle (SS)

I am sure you read our previous thread on SS where you sell slightly OTM options in a sideways market.

To create an IC

Create an SS first

Buy the next OTM CE

Buy the next OTM PE

Let’s clear with an example
Ex.

If Nifty is trading at 16300 and you expect it to trade in a narrow range of 200 points till expiry then

Sell 16400CE

Sell 16200PE

This is SS, right?

Now Buy 16500CE

Buy 16100 PE

That is IC
All strikes should belong to the same underlying, have the same number of lots, and same expiration
2/ The Credit Part – Max Profit
In the above Ex

Sell 16400CE @117

Sell 16200PE @157

Premium received = 274

Buy 16500CE @ 80

Buy 16100PE @ 117

Premium paid = 197

Net premium received = Received – Paid = 274 – 197 = 77

This net credit is the max profit potential in an IC
@117 @157 3/ Safety Comes at a Cost

Max profit potential in case of IC (77) is much less than SS (274), but consider this as cost for capping the risk

We know that there is unlimited risk in SS, in case market makes sharp move. This risk is capped with two long options in case of IC
@117 @157 4/ Max Loss Potential

Our sold strike = 16400

Our bought (protective) strike = 16500

Spread = 16500 – 16400 = 100

Max Loss = Spread – Net premium received

Spread = 100 – 77 = 23

Thereby our maximum loss reduces (from unlimited in SS) to 23 points
@117 @157 5/ IC Risk-Reward Ratio

From the above Ex

Max profit = 77

Max Loss = 23

Risk/Reward potential = 1:3 which is good

In most cases RR will be favorable, that is more than the risk involved
@117 @157 6/ IC Margin Requirements

I have put the above figures in Zerodha margin calculator and came up with following results:

a/ For the following Short Strangle
@117 @157 Margin Required = Rs1,19,237

This seems high for a strategy that is open-ended so it has to be covered as follows
@117 @157 b/ For Iron Condor

We added 100 points spread to the SS (long 16500CE & 16100PE)

Now Margin required = Rs37,693

We need significantly less margin in this 4legged IC than a 2-legged SS. This is because our short options have been funding our long options
@117 @157 7/ Breakeven Points (BE)

There are two breakeven points in IC

Upper BE = Short CE strike + Net premium received

Lower BE = Short PE Strike – Net Premium received

In the above Example

Upper BE = 16400 + 77 = 16477

Lower BE = 16200 – 77 = 16133
@117 @157 8/ Payoff Diagram

From the diagram you can see that you will have max profit if market expires within the short CE and PE strikes

The profit reduces as market expires between the short strikes and BE points

Outside the BE points, there is limited loss
@117 @157 9/ Five-point Summary

IC is an improvisation over SS

It makes money when market expires in the expected range

Has Narrower BE points

Has lesser margin requirements than SS

Got limited risk at the cost of less profit potential than SS
@117 @157 Stay tuned @finkarmaIN for more such writeups in coming days

Don’t forget to like and retweet

Thanks for reading

More from Finkarma

10 threads that will teach you more than any Course on Trading🧵

1/ Lies that you've been told about trading.

From:


2/ Pitfalls that every discretionary trader faces, and how to overcome them.

From: @KillerTrader_


3/ The only trading psychology post you need to read.

From: @indian_quant


4/ A thread on Trading mistakes.

It's inevitable that you will make a lot of mistakes in your trading career, what's truly important is if you learn from those mistakes or keep repeating them.

From:

More from Trading strategies

Detailed Study of Stocks that became 5X in past 2 Years
A Mega Thread🧵

Concepts :
Relative Strength
Stage Analysis

Retweet and Comment If you want to attend a live session on the same !


We have Got around 86 Stocks that became 5X in 2 years
These Belonged to various sectors and Groups

Excel Link for List of Stocks
https://t.co/jESOUM32b5
1/n


All stocks had few things in common :

Stocks doubled Before entering into Stage 2 Uptrend
52 week RS was positive in stage 2
90% stocks even gave all time high breakout after Stage 2
60 Stocks had market cap less than 1000 Cr

Examples : OLECTRA , PGEL
2/n


So What is Relative Strength ?

Relative strength is a strategy used in momentum investing and in identifying value stocks.

It focuses on investing in stocks or other investments that have performed well relative to the market as a whole or to a relevant benchmark.
3/n

How to Apply ?
Type
“Relative Strength”
Choose any
By bharattrader
By traderlion
By Modhelius
I use by bharattrader
In setting use 52 period
Use Weekly Chart
4/n

You May Also Like

IMPORTANCE, ADVANTAGES AND CHARACTERISTICS OF BHAGWAT PURAN

It was Ved Vyas who edited the eighteen thousand shlokas of Bhagwat. This book destroys all your sins. It has twelve parts which are like kalpvraksh.

In the first skandh, the importance of Vedvyas


and characters of Pandavas are described by the dialogues between Suutji and Shaunakji. Then there is the story of Parikshit.
Next there is a Brahm Narad dialogue describing the avtaar of Bhagwan. Then the characteristics of Puraan are mentioned.

It also discusses the evolution of universe.(
https://t.co/2aK1AZSC79 )

Next is the portrayal of Vidur and his dialogue with Maitreyji. Then there is a mention of Creation of universe by Brahma and the preachings of Sankhya by Kapil Muni.


In the next section we find the portrayal of Sati, Dhruv, Pruthu, and the story of ancient King, Bahirshi.
In the next section we find the character of King Priyavrat and his sons, different types of loks in this universe, and description of Narak. ( https://t.co/gmDTkLktKS )


In the sixth part we find the portrayal of Ajaamil ( https://t.co/LdVSSNspa2 ), Daksh and the birth of Marudgans( https://t.co/tecNidVckj )

In the seventh section we find the story of Prahlad and the description of Varnashram dharma. This section is based on karma vaasna.