In times of high IVR, we often look to delta neutral strategies like Strangles and Iron Condors to take advantage of the volatility contraction, allowing us to buy our options back for cheaper than we sold them. Oftentimes, selecting between the two depends on a trader’s available capital and risk tolerance. Today, tastylive lists the pros and cons of both strategies in-depth.
While both are neutral, positive theta generating positions that aim for collapses in volatility, there are a differences to keep in mind.
For one, Strangles are two legged, undefined risk spreads, whereas Iron Condors are 4 legged strategies with a known maximum profit/loss on entry.
The defined risk nature of the Iron Condor reduces the Buying Power requirement compared to a Strangle, but it also lowers the probability of profit on the strategy as well as reduces theta decay and a less negative [vega]( (meaning contractions in volatility won’t be paid as well because of the long options). Still, Iron Condors do have a higher return on capital.
With that in mind, does it make sense to increase our Iron Condor contracts to make up for the smaller theta and vega values? Using SPY as our underlying, our Research Team ran a study.
Ultimately, when tastylive matched the buying power for each strategy, our team discovered that more Iron Condor contracts increases risk(maximum loss) while not improving probability of success on the trade.
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.