Market Measures

Chicken Iron Condors

| Nov 14, 2013
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    Market Measures

    Chicken Iron Condors

    Nov 14, 2013

    At tastylive, we like options earnings plays. During the period leading up to the equity’s earnings, there is often a spike in implied volatility rank as uncertainty builds about what the earnings number will be. But, as we’ve explored in the past, the expected move number given before earnings can overstate the actual move.

    What does this mean for traders? This means that earnings trades set up opportunities to collect more premium than usual, allow us to widen the strikes between long and short options, and improve our probability of profit (POP).

    Given that actual moves can be overstated by expected moves, we like using the iron condor strategy around earnings (at times, however, the actual moves can jump wildly beyond expectations).

    An iron condor combines an out of the money short put spread with an out of the money short call spread. This creates a range around the underlying’s price in which we can profit, while being a defined risk strategy (meaning that it limits profitability, but also losses). Since an iron condor involves selling a call spread and a put spread, we will collect a credit from this trade.

    Traditionally, tastylive research has looked at iron condors for which 1/3 the width of the strikes (distance between the short and corresponding long legs) is collected as a credit, and how this type of trade fared during earnings plays (which are put on before earnings and taken off shortly after the announcement). But, a chicken iron condor calls for collecting 45-50% of the strike width in credit by tightening the short strikes. How does this strategy stack up?

    Looking at $AAPL, $NFLX, $AMZN, $GOOG, and $MA over the last two years, we tested 1/3 strike width iron condors, chicken iron condors, and iron condors with short strikes 1 standard deviation out-of-the-money. The profit and loss, number of winners, probability of winners, and max losses are shown for each strategy, with fascinating results illuminating the pros and cons of different iron condor strategies.

    When choosing a strategy, it is important to take risk tolerance into account. Each strategy tested assumes different levels of risk and max losses, metrics that can be useful for placing earnings trades.

    In summary, chicken iron condors are defined risk trades that allow us to limit risk by limiting profitability. They are an interesting earnings trade strategy, and can allow for traders to take advantage of heightened IV rank and premium.

    This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

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