Reverse Iron Albatross Spread

Reverse Iron Albatross Spread Risk Graph
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Reverse Iron Albatross Spread - Introduction


The Reverse Iron Albatross Spread is a complex volatile options strategy with limited maximum profit and limited maximum loss potential and profits when the underlying stock breaks out to upside or downside.

The Reverse Iron Albatross Spread is really a Reverse Iron Condor Spread that covers a much wider range of strike prices. The effect of using wider strike difference is a higher maximum profit and a lower maximum loss at the cost of a much wider breakeven point.

The Reverse Iron Albatross Spread belongs to a family of complex volatile options strategies named after creatures with increasing wing span representing the wider range of strike prices covered. From the Reverse Iron Butterfly Spread covering the smallest range of strike prices to the Reverse Iron Condor Spread covering a wider range of strike prices to the Reverse Iron Albatross spread covering the widest range of strike prices.

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When To Use Reverse Iron Albatross Spread?


The Reverse Iron Albatross Spread could be used for stocks that are expected to make a huge breakout to an uncertain direction. One can use this strategy ahead of earnings releases or important releases.

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How To Use Reverse Iron Albatross Spread?


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

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



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

The strike price of legs 2 and 3 above should be at least 2 strike prices away from the price of the underlying stock. The strike price of legs 1 and 4 should be just 1 strike away from legs 2 and 3. The wider the strike price of legs 2 and 3, the higher the maximum profit potential becomes and the lower the maximum loss potential becomes. The downside is that the wider legs 2 and 3 are, the further the break even points for the Reverse Iron Albatross Spread becomes, making it harder to make a profit.

Example : Assuming QQQQ trading at $43.57

Sell To Open 1 contract of Jan $46 Call at $0.10
Buy To Open 1 contract of Jan $45 Call at $0.60
Sell To Open 1 contract of Jan $41 Put at $0.20
Buy To Open 1 contract of Jan $42 Put at $0.59

Net debit = (($0.60 - $0.10) + ($0.59 - $0.20)) x 100 = $89.00 per position


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Trading Level Required For Reverse Iron Albatross Spread


A Level 3 options trading account that allows the execution of debits spreads is needed for the Reverse Iron Albatross Spread. Read more about Options Account Trading Levels.



Profit Potential of Reverse Iron Albatross Spread :


Reverse Iron Albatross Spreads achieve their maximum profit potential at expiration if the underlying stock expires above the Upper Breakeven Point or below the Lower Breakeven Point. The profitability of a reverse Iron Albatross spread can also be enhanced or better guaranteed by legging into the position properly.



Profit Calculation of Reverse Iron Albatross Spread:


Maximum Loss = Net debit.
Maximum Profit Possible = Greatest Difference Between Long and Short strike - Net debit

From the above example :

Maximum Loss = $89.00 per position.

Maximum Profit Possible = ($46 - $45) - $0.89 = $0.11 x 100 = $11 per position.



Risk / Reward of Reverse Iron Albatross Spread:



Upside Maximum Profit: Limited

Maximum Loss: Limited to net debit paid



Break Even Points of Reverse Iron Albatross Spread:


A Reverse Iron Albatross Spread is profitable as long as the price of the underlying stock exceeds the price range bounded by the Upper and Lower BreakEven points.

Upper Break Even Point = Long Call Strike + Net debit

Net debit = $0.89 , Long Call Strike = $45.00

Upper Breakeven Point = $45.00 + $0.89 = $45.89.


Lower Break Even = Long Put Strike - Net debit

Net debit = $0.89 , Long Put Strike = $42.00

Lower Breakeven Point = $42.00 - $0.89 = $41.11.


In this case, the Reverse Iron Albatross Spread position in our example is profitable as long as the QQQQ close outside the range of $41.11 to $45.89 at option expiration day.



Advantages Of Reverse Iron Albatross Spread:



:: Typically has a narrower breakeven range than a straddle or strangle.

:: Maximum loss and profits are predictable.

:: Able to profit whether the stock moves up or down.

:: Can be used by option traders who cannot use credit spreads.



Disadvantages Of Reverse Iron Albatross Spread:



:: Lower profit and higher loss than the Short Albatross Spread which is a credit spread.

:: Has a wider breakeven range than a Reverse Iron Condor Spread.



Adjustments for Reverse 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 put options and transform the position into a Bull Call Spread.

2. If the underlying asset has dropped in price and is expected to continue dropping, you could close out all the call options and transform the position into a Bear Put Spread. Such transformations can be automatically performed without monitoring using Contingent Orders.


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