ITM Iron Condor Spread

ITM Iron Condor Spread Risk Graph
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ITM Iron Condor Spread - Introduction



The ITM Iron Condor Spread is an advanced complex volatile options strategy that has the best reward risk ratio of all volatile options strategies. In fact, its reward risk ratio is so favorable that it has the potential to become an arbitrage position that makes a small profit when the price of the underlying stock remains stagnant and a big profit when the price of the underlying stock breaks out strongly to upside or downside.

This free options strategy tutorial shall explore the ITM Iron Condor Spread in depth, explain how to use it, how to turn it into an arbitrage, its calculations and more.
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ITM Iron Condor Spread - Classification



Strategy : Volatile | Outlook : High Volatility | Spread : Vertical Spread | Debit or Credit : Credit


What Is ITM Iron Condor Spread


The traditional Iron Condor Spread, which is a neutral options strategy, is made up of an OTM Bull Put Spread and an OTM Bear Call Spread. The ITM Iron Condor Spread transforms the Iron Condor Spread from a neutral options strategy into a volatile options strategy by flipping the Bull Put Spread and Bear Call Spread from out of the money strike prices into deep in the money strike prices. Yes, the ITM Iron Condor Spread is made up of a Deep ITM Bull Put Spread and a Deep ITM Bear Call Spread. By flipping both spreads from OTM strike prices to ITM strike prices, the ITM Iron Condor Spread also transforms into a volatile options strategy from a neutral options strategy.

The Deep ITM Bull Put Spread has one of the most favorable reward risk ratio of all bullish options strategies while the Deep ITM Bear Call Spread has one of the most favorable reward risk ratio of all bearish options strategies. This makes the ITM Iron Condor Spread the volatile options strategy with one of the most favorable reward risk ratio. In fact, because both the Deep ITM Bull Put Spread and Deep ITM Bear Call Spread have the potential of becoming arbitrage positions, they give the ITM Iron Condor Spread the potential, albeit a fairly low chance, of becoming an arbitrage position as well.

The ITM Iron Condor Spread's excellent reward risk ratio comes from the fact that it has an extremely low maximum loss potential while maintaining a maximum profit potential of 8 to 10 times higher than the maximum potential loss. However, such excellent reward risk ratio comes at the price of its maximum profit potential requiring the price of the underlying stock to move significantly. This is why the outlook of a ITM Iron Condor Spread is "High Volatility".


When To Use ITM Iron Condor Spread?


The ITM Iron Condor Spread could be used when one expects the price of the underlying stock to break out significantly in either direction by options expiration, wants as low a maximum loss potential as possible and has an options trading account level high enough for credit spreads.



How To Use ITM Iron Condor Spread?


ITM Iron Condor Spread consists of a Deep ITM Bull Put Spread and a Deep ITM Bear Call Spread on the same underlying stock.

(Buy ITM Call + Sell Deep ITM Call) + (Buy ITM Put + Sell Deep ITM Put)



ITM Iron Condor Spread Example



Assuming QQQ is trading at $63.

It's options chain is showing May $60 strike price call options trading at $3.10 and $55 strike price call options trading at $8.06. It's May $66 strike price put options are trading at $3.10 and $71 strike price put options are trading at $8.06.

Buy To Open 1 contract of May $60 Call at $3.10
Sell To Open 1 contract of May $55 Call at $8.06
Buy To Open 1 contract of May $66 Put at $3.10
Sell To Open 1 contract of May $71 Put at $8.06

Net Credit = (8.06 - 3.10) + (8.06 - 3.10) = 4.96 + 4.96 = $9.92




Choosing Strike Price and Expiration Month for ITM Iron Condor Spread


The choice of expiration month depends on how long you think it will take the price of the underlying stock to perform its breakout. If you expect the breakout to happen very quickly, then using the nearest expiration month is ok but if you expect the rally to be completed in 3 months, then using options with at least 3 months to expiration would be in order.

The choice of strike prices for the short options depends on how far you think the price of the underlying stock would breakout to and beyond. In the example above, we are expecting QQQ to rally to and beyond $71 or drop down to and below $55, hence writing the $71 strike price put options and $55 strike price call options. Bear in mind that the more in the money the strike prices of the short legs, the higher the maximum profit potential would be but the more the price of the underlying stock needs to move in order to achieve maximum profit and breakeven. This means that the higher the maximum profit potential, the lower the chances of reaching it becomes.

Take note that because short in the money options are used, the chances of them getting assigned early and breaking the strategy increases as expiration draws nearer. As such, it is advisable to use further month expiration options so that the expected move can be completed without getting too close to expiration.

The choice of strike prices for the long options depends on how far you wish for breakeven point to be. The deeper in the money the long options are, the further breakeven point becomes. Maximum profit and maximum loss would decline as well but will always maintain its extremely favorable reward risk ratio.

Rough Guide For A Standard ITM Iron Condor Spread



1. At least 3 months to expiration
(giving position enough time to move. Time decay has little impact in this strategy.)

2. Long options one strike in the money

3. Short options two to three strikes in the money


In order to keep the risk profile symmetrical, which means having equal profit, loss and breakeven points between going upwards and downwards, the strike difference between the calls, the strike difference between the puts as well as the distance of the long strike prices from the price of the underlying stock needs to be the same. This also means you have the freedom to adjust the risk profile of the ITM Iron Condor Spread to your specific inclinations. If you think the underlying stock has better chances of breaking out strongly to upside than downside, you could use farther strike prices for the put options legs and vice versa. This will skew the risk profile of the ITM Iron Condor Spread in the direction of your inclination.



Bullish Inclined ITM Iron Condor Spread


If you are of the opinion that the price of the underlying stock has a higher chance of a bullish breakout than a bearish breakout, you could skew the risk profile of the ITM Iron Condor Spread in favor of a bullish breakout by using further ITM strike prices for put options and nearer the money strike prices for call options, resulting in a risk profile that looks something like the one below:

Bullish Inclined ITM Iron Condor Spread Risk Graph



Bullish Inclined ITM Iron Condor Spread Example



Assuming QQQ is trading at $63. You are of the opinion that it will break out of a congestion area strongly with more inclination to upside and you expect that if QQQ should breakout upwards, it will reach and exceed the price of $71 while if it should breakout downwards, it would be not much lower than $60

It's May $60 strike price call options are trading at $3.10 and $62 strike price call options are trading at $1.10. It's May $66 strike price put options are trading at $3.10 and $71 strike price put options are trading at $8.06.

Sell To Open 1 contract of May $60 Call at $3.10
Buy To Open 1 contract of May $62 Call at $1.12
Buy To Open 1 contract of May $66 Put at $3.10
Sell To Open 1 contract of May $71 Put at $8.06

Net Credit = (3.10 - 1.12) + (8.06 - 3.10) = 1.98 + 4.96 = $6.94
This Bullish Inclined ITM Iron Condor Spread has a lower maximum loss potential and a nearer breakeven point than a regular ITM Iron Condor Spread as you will see in the profit/loss calculation section below.



Bearish Inclined ITM Iron Condor Spread


If you are of the opinion that the price of the underlying stock has a higher chance of a bearish breakout than a bullish breakout, you could skew the risk profile of the ITM Iron Condor Spread in favor of a bearish breakout by using further ITM strike prices for call options and nearer the money strike prices for put options, resulting in a risk profile that looks something like the one below:

Bearish Inclined ITM Iron Condor Spread Risk Graph



Bearish Inclined ITM Iron Condor Spread Example



Assuming QQQ is trading at $63. You are of the opinion that it will break out of a congestion area strongly with more inclination to downside and you expect that if QQQ should breakout downwards, it will reach and exceed the price of $55 while if it should breakout upwards, it would be not much higher than $66

It's May $66 strike price put options are trading at $3.10 and $64 strike price put options are trading at $1.12. It's May $60 strike price call options are trading at $3.10 and $55 strike price call options are trading at $8.06

Buy To Open 1 contract of May $60 Call at $3.10
Sell To Open 1 contract of May $55 Call at $8.06
Buy To Open 1 contract of May $64 Put at $1.12
Sell To Open 1 contract of May $66 Put at $3.10

Net Credit = (8.06 - 3.10) + (3.10 - 1.12) = 4.96 + 1.98 = $6.94
Similarly, the Bearish Inclined ITM Iron Condor Spread has a lower maximum loss potential and a nearer breakeven point than a regular ITM Iron Condor Spread as you will see in the profit/loss calculation section below.



ITM Iron Condor Spread Arbitrage


ITM Iron Condor Spread can become an arbitrage position with no possibility of loss when both its component ITM Bear Call Spread and ITM Bull Put Spread are put on as arbitrages or when the arbitrage minimum profit of one component is sufficient to cover the maximum loss on the other. In this case, instead of making a loss when the price of the underlying stock remain stagnant, the ITM Iron Condor Spread will make a very small profit and make a big profit if the price of the underlying stock breaksout strongly, resulting in the risk graph below.

Deep ITM Iron Condor Arbitrage Risk Graph

Please read the tutorials on the Deep ITM Bear Call Spread and Deep ITM Bull Put Spread for details on how to put them on as arbitrages.



Trading Level Required For ITM Iron Condor Spread


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



Profit Potential of ITM Iron Condor Spread


ITM Iron Condor Spread achieve its maximum profit potential when the underlying stock closes below the lower short strike price or above the higher short strike price by expiration. Maximum loss is achieved when the price of the underlying stock remains within the long strike prices upon expiration. The profitability of a ITM Iron Condor Spread can also be enhanced or better guaranteed by legging into the position properly.



Profit Calculation of ITM Iron Condor Spread


Maximum Profit = Net Credit of winning leg - maximum loss of losing leg
Maximum Loss = ((Difference between strikes of calls) + (Difference between strikes of puts)) - Net Credit

ITM Iron Condor Spread Profit/Loss Calculation



Assuming QQQ is trading at $63.

It's May $60 strike price call options are trading at $3.10 and $55 strike price call options are trading at $8.06. It's May $66 strike price put options are trading at $3.10 and $71 strike price are trading at $8.06.

Buy To Open 1 contract of May $60 Call at $3.10
Sell To Open 1 contract of May $55 Call at $8.06
Buy To Open 1 contract of May $66 Put at $3.10
Sell To Open 1 contract of May $71 Put at $8.06

Maximum Upside Profit = (8.06 - 3.10) - ((60 - 55) - (8.06 - 3.10)) = 4.96 - 0.04 = $4.92

Maximum Downside Profit = (8.06 - 3.10) - ((71 - 66) - (8.06 - 3.10)) = 4.96 - 0.04 = $4.92

Maximum Loss = ((60 - 55) + (71 - 66)) - 9.92 = 5 + 5 - 9.92 = $0.08

Reward Risk Ratio = 4.92 / 0.08 = 61.5 : 1

Bullish Inclined ITM Iron Condor Spread Profit/Loss Calculation



It's May $60 strike price call options are trading at $3.10 and $62 strike price call options are trading at $1.10. It's May $66 strike price put options are trading at $3.10 and $71 strike price put options are trading at $8.06.

Sell To Open 1 contract of May $60 Call at $3.10
Buy To Open 1 contract of May $62 Call at $1.12
Buy To Open 1 contract of May $66 Put at $3.10
Sell To Open 1 contract of May $71 Put at $8.06

Net Credit = (3.10 - 1.12) + (8.06 - 3.10) = 1.98 + 4.96 = $6.94

Maximum Upside Profit = (8.06 - 3.10) - ((62 - 60) - (3.10 - 1.12)) = 4.96 - 0.02 = $4.94

Maximum Downside Profit = (3.10 - 1.12) - ((71 - 66) - (8.06 - 3.10)) = 1.98 - 0.04 = $1.94

Maximum Loss = ((62 - 60) + (71 - 66)) - 6.94 = 7 - 6.94 = $0.06

Upside Reward Risk Ratio = 4.94 / 0.06 = 82.3 : 1

Downside Reward Risk Ratio = 1.94 / 0.06 = 32.2 : 1

As you can see here, the Bullish Inclined ITM Iron Condor Spread has a higher reward risk ratio to upside than the regular ITM Iron Condor Spread, has a lower maximum loss but a much lower reward risk ratio to downside.

Bearish Inclined ITM Iron Condor Spread Profit/Loss Calculation



It's May $66 strike price put options are trading at $3.10 and $64 strike price put options are trading at $1.12. It's May $60 strike price call options are trading at $3.10 and $55 strike price call options are trading at $8.06

Buy To Open 1 contract of May $60 Call at $3.10
Sell To Open 1 contract of May $55 Call at $8.06
Buy To Open 1 contract of May $64 Put at $1.12
Sell To Open 1 contract of May $66 Put at $3.10

Net Credit = (8.06 - 3.10) + (3.10 - 1.12) = 4.96 + 1.98 = $6.94

Maximum Downside Profit = (8.06 - 3.10) - ((66 - 64) - (3.10 - 1.12)) = 4.96 - 0.02 = $4.94

Maximum Upside Profit = (3.10 - 1.12) - ((60 - 55) - (8.06 - 3.10)) = 1.98 - 0.04 = $1.94

Maximum Loss = ((60 - 55) + (66 - 64)) - 6.94 = 7 - 6.94 = $0.06

Downside Reward Risk Ratio = 4.94 / 0.06 = 82.3 : 1

Upside Reward Risk Ratio = 1.94 / 0.06 = 32.2 : 1

As you can see here, the Bearish Inclined ITM Iron Condor Spread has a higher reward risk ratio to downside than the regular ITM Iron Condor Spread, has a lower maximum loss but a much lower reward risk ratio to upside.

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Risk / Reward of ITM Iron Condor Spread



Upside Maximum Profit: Limited

Maximum Loss: Limited



Break Even Points of ITM Iron Condor Spread:


A ITM Iron Condor Spread is profitable if the price of the underlying stock goes above the upper breakeven point or below the lower breakeven point.

Upper Breakeven = Long Put Strike - Maximum Loss Potential

Lower Breakeven = Long Call Strike + Maximum Loss Potential

From the above ITM Iron Condor Spread example :



Maximum Loss = $0.08, Long Call Strike = $60, Long Put Strike = $66

Upper Breakeven = $66 - $0.08 = $65.92

Lower Breakeven = $60 + $0.08 = $60.08



ITM Iron Condor Spread Greeks



Delta: Neutral
Under conditions of put call parity and when both call and put options have the exact same moneyness, the ITM Iron Condor Spread is delta neutral, meaning its price will be insensitive to small changes in price of the underlying stock.

Gamma: Positive
Being slightly Gamma Positive, the delta of a ITM Iron Condor Spread will increase in the direction of change of the underlying stock. If the price of the underlying stock is going down, the delta of the ITM Iron Condor Spread will become increasingly negative and if the price of the underlying stock is going up, the delta of the ITM Iron Condor Spread would become increasingly positive. This is characteristic of all volatile options strategies.

Vega: Positive
Vega for ITM Iron Condor Spreads tends to be positive and will increase the value of the position when implied volatility goes up and decrease value when implied volatility goes down.

Theta: Slightly Positive
ITM Iron Condor Spreads are not significantly affected by Time Decay as the erosion of extrinsic value on the long legs are offset by the erosion of extrinsic value on the short leg and there is generally very little extrinsic value remaining in such in the money options.



Advantages Of ITM Iron Condor Spread



:: Highest ROI of the complex volatile options trading strategies.

:: Able to achieve arbitrage when legged in correctly.



Disadvantages Of ITM Iron Condor Spread:



:: Requires margin.

:: Requires a significant breakout in order to become profitable.



Adjustments for ITM Iron Condor Spreads Before Expiration :



1. When the price of the underlying stock makes its breakout move in one direction, options on the opposite leg can be closed out in order further increase profitability. This means transforming the position into either a Deep ITM Bear Call Spread if the breakout is to downside, or Deep ITM Bull Put Spread if the breakout is to upside. Such transformations can be automatically performed without monitoring using Contingent Orders.


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