# Short Iron Condor

### SHORT IRON CONDOR

**Strategy Details**

**Strategy Type: Neutral on direction **and bearish** on volatility**

**# of legs: **4 (Long 1 Lower Strike Put + Short 1 Lower Middle Strike Put + Short 1 Higher Middle Strike Call + Long 1 Higher Strike Call)

**Maximum Reward: **Limited to the extent of net premium received

**Maximum Risk: **Lower Middle Strike Price - Lower Strike Price - Net Premium Received

**Lower Breakeven Price: **Lower Middle Strike Price - Net Premium Received

**Upper Breakeven Price: **Higher Middle Strike Price + Net Premium Received

**Payoff Calculation: **Payoff of lower strike Long Put+ Payoff of lower-middle strike Short Put + Payoff of higher middle strike Short Call + Payoff of higher strike Long Call

### Explanation of the Strategy

A Short Iron Condor is a strategy that involves buying a lower strike Put, selling a lower middle strike Put, selling a higher middle strike Call, and buying a higher strike Call. Each of these options would have the same underlying instrument and expiration date. Usually, the lower strike and the lower middle strike Puts are OTM Puts, whereas the higher middle strike and the higher strike Calls are OTM Calls. At the time of initiating this strategy, the underlying price is usually somewhere between the two middle strikes. Usually, all the four options are equidistant from each other. That said, this is not a hard and fast rule. Sometimes, to account for a wider maximum profit zone, traders prefer keeping a wider distance between the two middle strikes as compared to the distance between the outer strike and the corresponding middle strike.

A Short Iron Condor is a neutral strategy in terms of direction that works best when the underlying price consolidates. The trader who initiates this strategy would want the underlying price to stay between the two middle strikes until expiration. Hence, it can be said that this strategy is neutral on direction and bearish on volatility. That said, sometimes this strategy can take a slight bullish or bearish tilt. For instance, at the time of initiation, if the underlying price is below the two middle strikes, the strategy would be slightly bullish. On the other hand, if the underlying price is above the two middle strikes, the strategy would be slightly bearish. A Short Iron Condor has two breakeven points: lower and upper. The position is profitable as long as the underlying price is within the two breakeven points and is unprofitable when the underlying price is outside either of the two breakeven points. Both profits and losses under this strategy are limited. Maximum profit occurs when the underlying price is between the two middle strikes, while maximum loss occurs when the underlying either falls below the lower strike or rises above the higher strike.

A Short Iron Condor is a net credit strategy. In terms of the risk reward profile, a Short Iron Condor is quite attractive. In absolute terms, the maximum potential profit under this strategy tends to be larger than the maximum potential loss. As a result, this strategy can be initiated by intermediate option traders as well. Also, as we shall later see, Short Iron Condor has a similar payoff structure as a Long Call Condor or a Long Put Condor. However, there are differences. The major difference is that Long Call/Put Condor are net debit strategies, while a Short Iron Condor is a net credit strategy.

### Benefits of the Strategy

· This is a net credit strategy

· The risk of this strategy tends to be smaller than the potential reward

· Time decay benefits the position, as long as it is profitable

· Maximum loss under this strategy is limited

### Drawbacks of the Strategy

· When the underlying price is between the middle strikes, rise in volatility would hurt the position

· If the underlying price moves outside one of the two breakeven points, the trader will incur a loss

### Strategy Suggestions

· Ensure that you expect the underlying to remain in a range and consolidate near the two middle strikes

· Ensure that you have a bearish stance on volatility, which you expect to reduce once the position has been initiated

· Ensure that the strikes are evenly placed. In other words, see that the distance between the lower and the lower middle strike is equal to that between the higher middle and the higher strike

· However, sometimes, traders keep the distance between the lower middle and the higher middle strikes slightly wider than the other two to account for a larger maximum profit zone

· The spread between the strikes will be a trade-off between the risk and the reward

· The wider the difference between the adjacent strikes, the higher will be the risk but so would be the reward, and vice versa

· Also, the wider the difference between the adjacent strikes, the larger would be the profit making zone, and vice versa

· As this is a range bound strategy that benefits from falling volatility, ensure that you execute this strategy when there is less time to expiration, as this would give you less time to go wrong

· Ensure there is sufficient liquidity in the underlying that is being chosen to initiate this strategy

### Option Greeks for Short Iron Condor

**GreekNotes Delta: **Delta is at or near zero at the initiation. It tends to peak out above zero when the underlying price is below the lower strike and bottom out below zero when the underlying price is above the higher strike. That said, while Delta does become non-zero as the underlying price moves, it does not deviate much from zero. As such, changes in the price of the underlying do not have much impact on this strategy because of the way it is structured.

**Gamma: **Gamma is negative and is at its lowest point in between the two middle strikes. As the underlying price starts moving away from the midpoint of the two middle strikes and approaches either the lower or the higher strike, Gamma tends to move into positive before peaking out around these extreme strikes.

**Vega: **Vega is negative and is at its lowest point between the two middle strikes, meaning the negative impact of a rise in volatility is the highest around the middle strikes. Volatility hurts as long as the position in profitable. That said, Vega turns positive when the position becomes unprofitable, meaning a rise in volatility now starts helping the position.

**Theta: **Theta is positive and is at its highest point between the two middle strikes, meaning time decay is most helpful around the middle strikes. Time decay benefits the position as long as it is profitable. That said, Theta turns negative when the position becomes unprofitable, meaning time decay now starts hurting the position.

### Payoff of Short Iron Condor

The above is the payoff chart of a Short Iron Condor strategy. Notice that the strategy achieves its maximum profit potential when the underlying price is within the range of the two middle strikes. On the other hand, if the underlying price falls below the lower strike or rises above the higher strike, the strategy achieves its maximum loss potential. Finally, notice that the strategy is profitable when the underlying price is within the two breakeven points and is unprofitable when the underlying price moves outside either of the two breakeven points.

### Example of Short Iron Condor

Let us say that Mr. ABC has decided to execute a Short Iron Condor strategy on TCS. The details of the strategy are as below:

· Strike price of OTM long Put = 1940

· Strike price of OTM short Put = 1980

· Strike price of OTM short Call = 2020

· Strike price of OTM long Call = 2060

· LongPut premium (lower strike) = ₹4

· Short Put premium (lower middle strike) = ₹13

· Short Call premium (higher middle strike) = ₹24

· Long Call premium (higher strike) = ₹9

· Net Credit = ₹24 (13 + 24 - 4 - 9)

· Net Credit (in value terms) = ₹6,000 (24 * 250)

· Lower Breakeven point = 1956 (1980 - 24)

· Upper Breakeven point = 2044 (2020 + 24)

· Maximum reward = ₹6,000

· Maximum risk = ₹4,000 ((1980 - 1940 - 24) * 250)