SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Reverse Iron Condor Strategy


The Reverse Iron Condor (RIC) is a limited risk, limited profit trading strategy that is designed to earn a profit when the underlying stock price makes a sharp move in either direction. The RIC Spread is where you buy an Iron Condor Spread from someone who is betting on the underlying stock staying stagnant.

Introduction

 

Reverse Iron Condor Construction

  • Buy 1 OTM Put
  • Sell 1 OTM Put (Lower Strike)
  • Buy 1 OTM Call
  • Sell 1 OTM Call (Higher Strike)

Capture.PNG

 

Reverse Iron Condor has a limited gain and a limited loss potential. 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. 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.

 

Compared to a straddle option strategy, RIC has limited gain potential, but it also needs the stock to move less to be profitable. It is basically a combination of bull call debit spread and bear put debit spread. You can adjust the strikes based on your expectation of the move. 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).

 

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. It can be used on stocks like NFLX, AMZN, GOOG, TSLA, PCLN etc.

 

Using Reverse Iron Condor through Earnings 

 

GOOG was scheduled to report earnings on April 21, 2016. The At-The-Money weekly straddle ($760 strike) was trading around $41, implying $41 or 5.3% move.

 

If you believed that GOOG is going to move, you had two options:

 

Option #1: buy a straddle for $41 debit

  • Buy 1 760 Put
  • Buy 1 760 Call

 

Option #2: buy RIC (Reverse Iron Condor) for 1.75 debit

  • Buy 1 745 Put
  • Sell 1 740 Put (Lower Strike)
  • Buy 1 775 Call
  • Sell 1 780 Call (Higher Strike)

 

Straddle would need $41 move just to break even, but would have unlimited profit potential if the stock moved big time. It also would not lose as much if the stock moved less than expected.

 

RIC would need only $20 move (above $780 or below $740) to make money.

 

The next day GOOG moved $40 and closed at $719. 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.

 

Risk-Management-Profit-Loss.jpg

 

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. The risk of 80-100% loss is real.

 

Unfortunately, many options gurus present this strategy as almost risk free money, completely ignoring the risks. Here are two examples.

 

A Seeking Alpha contributor suggested the following play on GOOG earnings on April 12, 2012 with GOOG at $632:
 

Quote
  • Buy twenty (20) April Week 2 $610.00 put options
  • Sell twenty (20) April Week 2 $600.00 put options
  • Buy twenty (20) April Week 2 $650.00 call options
  • Sell twenty (20) April Week 2 $660.00 call options

Rationale behind the trade:
 

"Google is a notorious big-mover after reporting. I am completely confident that the trade recommendation I am writing about will work like a charm."

 


What is completely missing in this comment is the disclosure of the options trading risk. The next day GOOG closed at $624, and the trade has lost 100%.

 

As our contributor Chris (cwelsh) mentioned in the comments section:

 

"Earnings are wild and unpredictable. A careful analysis and you can improve your odds, but you always have to factor in position sizing and potential loss into any trade. 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."

 

I recommend reading the comments section of the article, it can tell a lot about different people's approaches to trading and risk.

 

The second example is from a website that is using the strategy cycle after cycle. Here is the quote:

 

"The Debit Iron Condor is used primarily on stocks that have a long history of big moves when announcing their quarterly earnings. We have a very good idea of how big the move will be, in one direction or the other. 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."

 

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%. 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. 

 

One way to reduce the risk is using more distant expiration instead of the weekly options. The closer the expiration, the bigger the impact on trade. There is a trade off with respect to time, move and implied volatility drop. If the stock doesn't move, the further expiration trade will lose less because there still will be some time value left. 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.  

Unfortunately, we tried this strategy too in 2016, and the results were pretty bad. You can read more here. We don't hold those trades through earnings anymore, but we do use the strategy before earnings and make sure to be before the earnings announcement.

 

The Bottom Line

If you expect a stock to move significantly but don't want to bet on direction, Reverse iron Condor is a good strategy to implement. The maximum profit and the maximum loss are both predictable, and you can adjust the strikes based on your expectation how much you  the price will move.

 

This strategy can be successfully used for trading stocks with history of big moves. GOOG, NFLX, AMZN, TSLA, BIIB are good candidates. However, earnings are unpredictable, and you need to control the risk with proper position sizing. It is definitely possible to lose 100% with this strategy. I would define it as high probability high risk strategy.

 

One of the members asked me on the forum if we are going to play GOOG and AMZN with RIC. Based on earnings uncertainty and our bad experience earlier this year, I decided to skip. It was a good call. GOOG RIC would be a 100% loser, and AMZN would be a borderline as well, depending on the strikes. 

 

Related articles

 

Want to learn more? We discuss all our trades on our forum.

 

Start Your Free Trial

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Options on Options

    Traders have long known that options can be opened on many different securities. Among the most ingenious of these are options on options. There are four types of these: call on a call (CoC), a call on a put (CoP), a put on a call (PoC), and a put on a put (PoP).

    By Michael C. Thomsett,

    • 0 comments
    • 246 views
  • The Wheel Trade

    The “wheel” trade is variously described as a beginner’s strategy, a combination to exploit features of both calls and puts, and as “perfect” solution to the well-known risks of shorting calls, even when covered. The wheel could be defined as any of these, but a larger question should be: Is the wheel an elegant method for making profits consistently, or just a gimmick?

    By Michael C. Thomsett,

    • 0 comments
    • 539 views
  • Chooser Options

    Most options traders see their world as a choice between calls or puts, alone or in various combinations. But there is more. With a chooser option, traders can open a position and decide later whether it will be a call or a put. This is also called an as you like it option.

    By Michael C. Thomsett,

    • 0 comments
    • 466 views
  • Leveraged Anchor 2020 Year In Review

    Steady Options has now been trading the Leveraged Anchor strategy for two years, and, somewhat to my surprise, 2020 went even better than 2019. On the year, Leveraged Anchor was up 31.7%, while the total return of the S&P 500 was 18.4%.

    By cwelsh,

    • 2 comments
    • 1,287 views
  • Ratchet Options

    The “ratchet option” is so-called because as a series, each successive position activates when the previous option has expired. The trader ratchets up (or down) to the next position. Each one is set up to be as close to the money as possible. It has many names, including cliquet, moving strike, ladder, lock-in, or reset option.

    By Michael C. Thomsett,

    • 0 comments
    • 486 views
  • Steady Momentum 2020 Year in Review

    Steady Momentum Put Write (SMPW) is one of the available subscription services at Steady Options. We launched the strategy in early 2019, so we now have two years of performance to evaluate on both an absolute basis and relative to the strategy’s benchmark, PUTW (WisdomTree CBOE S&P 500 PutWrite Strategy Fund). 

    By Jesse,

    • 0 comments
    • 468 views
  • SteadyOptions 2020 Year In Review

    2020 marks our 9th year as a public trading service. It was an excellent year for us. We closed 130 winners out of 194 trades. Our model portfolio produced 117.1% compounded gain on the whole account based on 10% allocation per trade. We had only three losing months in 2020. 

    By Kim,

    • 0 comments
    • 749 views
  • The Jump-Diffusion Pricing Formula

    One of the more complex areas of options analysis involves pricing formulas. The best known among these is the Black Scholes Model (BSM). This is a widely cited method for attempting to determine what the option’s premium should be, but it is deeply flawed.

    By Michael C. Thomsett,

    • 0 comments
    • 514 views
  • Ranges of Exotic Options

    The standard call and put are well known to all option traders, but many exotic and more advanced options can also be opened. Whether a specific broker allows trading in these, and whether a trader has the necessary trading level, are questions to be addressed. This article just defines many of the exotic options that are possible.

    By Michael C. Thomsett,

    • 0 comments
    • 591 views
  • What To Do Before Committing To Trading

    Trading cryptocurrency has become a very popular and significant part of life. While it’s not for everyone, it’s certainly for an awful lot of people. There’s money to be made and areas to be invested in, and people will do what they can to make either a quick buck or an amazing figure.

    By Kim,

    • 0 comments
    • 757 views

  Report Article

We want to hear from you!


The RIC definitely hurt 2016 thus far!  Without it, it would have been another very succesful year.  Glad to see SO climbing back.

Share this comment


Link to comment
Share on other sites
Guest Rookie Mike

Posted

Rookie here: Would a RIC win ration be greater, providing stock was expecting a big move, if the long put and call were both at the money?

Share this comment


Link to comment
Share on other sites

@Kim In Option #2 in the GOOG example I am having trouble with the strikes.  Assuming 775.7 is really 775.5 and assuming 780 and 740 are identified correctly as the High and Low strikes, then the RIC would be  Buy 775.5 call, Buy 744.5 put, Sell 780 call, Sell 740 put. Would you please check this. Thanks

Share this comment


Link to comment
Share on other sites


Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs Expertido