Iron Albatross Spread

How Does The Iron Albatross Spread Work in Options Trading?

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Iron Albatross Spread - Introduction

The Iron Albatross Spread is really just an Iron Condor Spread with a wider spread difference. This family of complex neutral options strategies are named after creatures with increasing wing span in order to reflect the increasing range of strike prices that are covered; From Iron Butterfly Spreads with the tightest range of strike prices to the Iron Condor Spread with a wider range of strike prices to the Iron Albatross Spread which covers the widest range of strike prices. In fact, there are many literatures on options trading that simply call this the Wide Iron Condor Spread or simply an Iron Condor Spread using further out of the money options.

The Iron Albatross Spread has the widest profitable range in all of the complex neutral options strategies while increasing the profitability and decreasing the maximum loss of the normal Albatross Spread. However, due to the fact that the Iron Albatross Spread is a credit spread, it cannot be performed by many beginner options accounts or accounts without sufficient margin.

Find Options Strategies With Similar Risk Profiles

When To Use Iron Albatross Spread?

One should use a Iron Albatross Spread when one expects the price of the underlying asset to trade within a pre-determined, fairly wide, price range over the life of the options contracts involved.

How To Use Iron Albatross Spread?

There are 4 option trades to establish for this options strategy : 1. Buy To Open X number of far Out Of The Money Call Options. 2. Sell To Open X number of Out Of The Money Call Options. 3. Buy To Open X number of far Out Of The Money Put Options. 4. Sell To Open X number of Out Of The Money Put Options.

Buy Far OTM Call + Sell OTM Call + Buy Far OTM Put + Sell OTM Put

Veteran or experienced option traders would identify at this point that the Iron Condor Spread actually consists of an out of the money Bear Call Spread and an out of the money Bull Put Spread.

Out of the money bear call spreads profit when the underlying stock remains stagnant, rises or drops slightly while out of the money bull put spreads profit when the underlying stock remains stagnant, drops or rises slightly. When both options strategies are combined, the net effect is a position which profits greatly when stagnant and decreases in profitability when the underlying stock rises and drops to either component spread.

The choice of which strike prices to buy the long legs (trades 1 and 3 above) at depends on the range within which the underlying asset is expected to trade in (Profitable Range). The further away from the money the 2 long legs are, the lower the risk (as the underlying stock needs to move further in order to exit the profitable range), but the higher the maximum loss would be should the profitable range be exited. Again, this is a trade-off that all option traders need to decide and accept when trading any kind of option strategies.

The difference between the strike price of the short call option and the short put option determines the range within which the position will result in its maximum profit potential. The wider the difference, the lower the maximum profit potential but the higher the probability that the stock will end up within that range upon expiraiton. The narrower the difference, the higher the maximum profit potential but the less likely the Iron Albatross Spread will yield that maximum profit. Again, another trade-off.

Iron Albatross Spread Example: Example : Assuming QQQQ trading at $43.57 Buy To Open 1 contract of Jan $46 Call at $0.10 Sell To Open 1 contract of Jan $45 Call at $0.60 Buy To Open 1 contract of Jan $41 Put at $0.20 Sell To Open 1 contract of Jan $42 Put at $0.59 Net Credit = (($0.60 - $0.10) + ($0.59 - $0.20)) x 100 = $89.00 per position

Trading Level Required For Iron Albatross Spread

A Level 4 options trading account that allows the execution of credit spreads is needed for the Iron Albatross Spread. Read more about Options Account Trading Levels.

Profit Potential of Iron Albatross Spread :

Iron Albatross Spreads achieve maximum profit potential at expiration when the price of the underlying stock is within the strike price range bounded by the short call and put options. Maximum profit for the Iron Albatross Spread is equal to its net credit.

The profitability of an iron albatross spread can also be enhanced or better guaranteed by legging into the position properly.

Profit Calculation of Iron Albatross Spread:

Maximum Profit = Net Credit.
Maximum Loss Possible = Difference in strike between long and short strikes - Net Credit

Iron Albatross Spread Example: From the above example : Assuming QQQQ close at $43.57 at expiration. Maximum Profit = $89.00 per position. Maximum Loss Possible = ($46 - $45) - $0.89 = $0.11 x 100 = $11 per position.

Risk / Reward of Iron Albatross Spread:

Upside Maximum Profit: Limited to net credit gained

Maximum Loss: Limited to calculated maximum loss

Break Even Points (Profitable Range) of Iron Albatross Spread:

An Iron Albatross Spread is profitable as long as the price of the underlying stock remains within the Profitable Range bounded by the Upper and Lower BreakEven points.

Upper Break Even Point = Short Call Strike + Net Credit

Net Credit = $0.89 , Short Call Strike = $45.00 Upper Breakeven Point = $45.00 + $0.89 = $45.89.

Lower Break Even = Short Put Strike - Net Credit

Net Credit = $0.89 , Short Put Strike = $42.00 Lower Breakeven Point = $42.00 - $0.89 = $41.11.

Advantages Of Iron Albatross Spread:

Able to profit on stagnant stocks.

Being a credit spread, it reduces overall risk with a higher probability of ending in a profit than a debit spread.

Maximum loss and profits are predictable.

Very versatile as position can be transformed into a Bear Call Spread or Bull Put Spread easily.

Disadvantages Of Iron Albatross Spread:

Larger commissions involved than simpler strategies with lesser trades.

Not a strategy that traders with low trading levels can execute.

Adjustments for Iron Albatross Spreads Before Expiration :

1. If the underlying asset has gained in price and is expected to continue rising, you could close out all the call options and transform the position into a Bull Put Spread.

2. If the underlying asset has dropped in price and is expected to continue dropping, you could close out all the put options and transform the position into a Bear Call Spread.

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