IRON CONDOR EXAMPLE FULL
On the other hand, if it does move, the gains will be less as well, and you will have to wait longer to realize the full potential. If the stock doesn't move, the further expiration trade will lose less because there still will be some time value left. The closer the expiration, the bigger the impact on trade. There is a trade off with respect to time, move and implied volatility drop. One way to reduce the risk is using more distant expiration instead of the weekly options. Big percentage of wins means nothing if your losers are much higher than the winners, and you can do nothing to control the losers due to IV collapse. The problem is, once again, complete lack of disclosure of the option trading risk. Even if the "history truly repeats itself" 80% of the time, in 20% of the cases when it doesn't, the strategy can lose 100%. And the amazing thing about studying history is that history truly repeats itself, and that means a big percentage of wins. The magic works when the Debit Iron Condor is combined with big moves from stocks on earnings day." We have a very good idea of how big the move will be, in one direction or the other. "The Debit Iron Condor is used primarily on stocks that have a long history of big moves when announcing their quarterly earnings. The second example is from a website that is using the strategy cycle after cycle. I recommend reading the comments section of the article, it can tell a lot about different people's approaches to trading and risk. My entire point of my posts was that I think a discussion of risks should always be included in any article that discusses huge potential gains." A careful analysis and you can improve your odds, but you always have to factor in position sizing and potential loss into any trade. The next day GOOG closed at $624, and the trade has lost 100%.Īs our contributor Chris (cwelsh) mentioned in the comments section: What is completely missing in this comment is the disclosure of the options trading risk. I am completely confident that the trade recommendation I am writing about will work like a charm." "Google is a notorious big-mover after reporting. Sell twenty (20) April Week 2 $660.00 call options.Buy twenty (20) April Week 2 $650.00 call options.Sell twenty (20) April Week 2 $600.00 put options.
Buy twenty (20) April Week 2 $610.00 put options.Here are two examples.Ī Seeking Alpha contributor suggested the following play on GOOG earnings on Apwith GOOG at $632:
IRON CONDOR EXAMPLE FREE
Unfortunately, many options gurus present this strategy as almost risk free money, completely ignoring the risks. The biggest drawdown of the RIC strategy before earnings is that if the stock doesn't move enough after earnings, IV collapse will crush the options prices. Since it was below the short put strike, the RIC made a nice 43% gain (2.50/1.75), while the straddle was barely breakeven. The next day GOOG moved $40 and closed at $719. RIC would need only $20 move (above $780 or below $740) to make money. It also would not lose as much if the stock moved less than expected. Straddle would need $41 move just to break even, but would have unlimited profit potential if the stock moved big time. Option #2: buy RIC (Reverse Iron Condor) for 1.75 debit If you believed that GOOG is going to move, you had two options: The At-The-Money weekly straddle ($760 strike) was trading around $41, implying $41 or 5.3% move. GOOG was scheduled to report earnings on April 21, 2016. Using Reverse Iron Condor through Earnings It can be used on stocks like NFLX, AMZN, GOOG, TSLA, PCLN etc. One of the common uses of the Reverse Iron Condor strategy is betting on a sharp move on one of the high flying stocks after earnings. Constructing the trade with further OTM options will provide a better risk/reward, but lower probability of success (the stock will need to move more to produce a gain). You can adjust the strikes based on your expectation of the move.
It is basically a combination of bull call debit spread and bear put debit spread. In either situation, maximum profit is equal to the difference in strike between the calls (or puts) minus the net debit taken when initiating the trade. It will result in a loss if the price doesn't move far enough in either direction, or if it stays the same.Ĭompared to a straddle option strategy, RIC has limited gain potential, but it also needs the stock to move less to be profitable. The maximum gain It is attained when the underlying stock price drops below the strike price of the short put or rise above or equal to the higher strike price of the short call. Reverse Iron Condor has a limited gain and a limited loss potential.