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.
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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.
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
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
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.
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.
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 Loss Possible = ($46 - $45) - $0.89 = $0.11 x 100 = $11 per position.
Upside Maximum Profit: Limited to net credit gained
Maximum Loss: Limited to calculated maximum loss
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.
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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