Iron Condor - Maximum loss

[AlphaLine]

IC & IV

Could someone please clarify IC & IV. I had read that IC should only be sold when IV is high.

1/ Since the positions in an IC are the same expiration then the difference in IV is relative, is my opinion correct?

2/ The same would hold true for a vertical?

Thanks for the insight.

 

[spindr0]

Okay.. say 100 straddle = 10 and the 95-105 strangle = 6... if you sell the IC, you receive 4.

What you have described is an Iron Butterfly. An Iron Condor involves a pair of strangles.

 

[spindr0]

IC & IV

Could someone please clarify IC & IV. I had read that IC should only be sold when IV is high.

Higher IV increases the value of closer to the money options than those further away so the net credit for a vertical or an iron condor will be higher when IV is higher.

The counterbalance is that higher IV raises the value of delta so the probability of touch and the probability of expiring ITM both increase.

 

[moolah]

This tread is going further and further away from its main topic.

But is my understanding correct, in an iron condor context, maximum loss is essentially when the market turns against me and either the 2 CALL legs or the 2 PUT legs get triggered

 

[Kim Klaiman]

IMO, max profit is never the theoretical max. No one lets these spreads go to expiration, even with cash settled indexes. There is a point you will want to exit. You should figure that in to educe your max.

This is how disciplined traders should manage those trades - but not everyone does it this way. Some people actually let them go into expiration. Of course they eventually learn the hard way.

 

[JackRab]

What you have described is an Iron Butterfly. An Iron Condor involves a pair of strangles.

you're right.. apologies.

But the max value will still be the similar... depends on the strike difference..

So, 90-95/100-105 IC will have max value at/below90 or at/above 105... value =5
between 95 and 100 it's 0

 

[spindr0]

This tread is going further and further away from its main topic.

But is my understanding correct, in an iron condor context, maximum loss is essentially when the market turns against me and either the 2 CALL legs or the 2 PUT legs get triggered

Threads have a way of going in the direction of whatever comments made interest posters.

The maximum risk of an iron condor is the width of the widest spread less the premium received.

After you grasp the construction as well as the R/R of an IC, look into developing a plan as to how you will manage one that is moving against you. For example, if the strikes are wider, if the underlying drops "X" points, you might consider rolling the call spread down "X" points if it can generate additional premium to reduce the potential loss if it continues down. This assumes that you believe that the position is worth defending (versus taking a modest loss and moving on).

For example, if XYZ is 100 and you do a 90p-95p-105c-110c IC, your short strikes are 5 points OTM initially. If XYZ drops 5 points then roll the call spread down 5 pts for a credit so the call spread is back to being 5 pts OTM.

There are several things that you can do to defend. I'm just suggesting that you don't sit there like a deer in the headlights and rack up losses, married to hope :->)

 

[Illini Trader]

IMO, max profit is never the theoretical max. No one lets these spreads go to expiration, even with cash settled indexes. There is a point you will want to exit. You should figure that in to educe your max.

You are the pro here so I am surprised to hear you say that no one lets cash settled indexes go to to expiration. I have done it both ways and it is much cheaper to let it expire in the money. You save on commissions and you don't have to pay the ridiculous MM spread that persists even 5 minutes before expiration. If you let it expire you get the actual settlement price. And if it is close sometimes it even dips below your sell strike for a max profit.

Even if it is a max loss they don't let you out at the max loss spread. You have to pay and extra cent or two for them to take your trade.

 

[Windlesham1]

Tasty Trade have some stats on taking 50% profit on these- it's free it's on the interweb

 

[IgorVI]

This tread is going further and further away from its main topic.

But is my understanding correct, in an iron condor context, maximum loss is essentially when the market turns against me and either the 2 CALL legs or the 2 PUT legs get triggered

With iron condors, max loss occurs when underlying expires outside of both long and short strike of either spread. If you sold an IC for $1 and your margin or risk is $4 then 4 is the max absolute loss for the trade.

Hope this helps.