IRON CONDORS
Iron condors have a wide profit zone but a more balanced reward to risk ratio.
In our first example of a neutral options spread, we choose a spread which
has an even risk reward ratio with a fairly wide profit zone.
This will involve the following options for OEX (s&p100 index) at on
12/14/00 at a current price of 710.67.
(buy jan-01 750call @ 7) + (sell 730call @ 13.6) + (sell 690put @ 12.9) + (buy
670put @ 8.9)
By reviewing the Position summary table in the upper right corner, we see the
max reward is $1030 and the max risk in $970.
The PL graph reveals a large area of max profit of $1000 from about 690 to 730.
The full profit range is 680 to 739 with a
probability of profit of 62.76%.
The expected return comes to $285. Expected return is good overall measure of
risk reward and probability or profit.
Expected return = (max reward x probability of profit) - (max risk x probability
of loss)
= ($1030 x 62.76%) - ($970 x 37.24%)
= $285
Also take notice the PL graphs in the upper center and how this iron condor
position is formed by a 2 debit spreads (call and put).
Upon reviewing the profit zone for this spread overlayed on top of the 90 day
historical price history,
We see a fairly narrow range with the price (blue line) being well above the
profit zone (red and yellow lines)
for the first 4 out of the past 6 months. However, since this spread expires in
40 days, we have a pretty
good chance of staying within the profit zone.
For our second neutral spread, we will try to be a little more aggressive and
maximize our expected return: increasing
our max return and profit zone, but sacrificing the larger area of max profit.
This will involve the following options for OEX (s&p100 index) at on
12/14/00 at a current price of 710.67.
(buy jan-01 770call @ 3) + (sell 710call @ 22.5) + (sell 710put @ 19.6) + (buy
650put @ 5.6)
We initially observe from the PL chart an "Indian Teepee" shaped
Profit line with the maximum profit at $3000 if the OEX stays precisely at 710.
We see a steep drop off if the OEX moves up or down from that point. The Profit
zone is wider between 676 and 743 and probability of profit is
higher at 68.41%. The expected return comes out to an impressive $ 1379 due to
the high probability of profit and decent rew/risk ratio.
From the 90 day historical price w/ profit zones chart, we observe a slightly
wider profit zone looking fairly comfortable given our short
time to expiration of 40 days.