Best option trading strategy: Iron Condor!
- You can bet on a range.
- You can get a decent risk:reward of a system which is bound to have a high winning ratio.
- No unlimited loss.
The price of options decay with the passage of time. It’s called theta which slaughters option buyers. But in option selling, when the trade goes wrong, we’re talking possibility of having an unlimited loss!
I actually forgot about this position the last expiry amidst my other positions and BankNIFTY gaped up and ran to the moon.
Why we love options!
The primary reason for loving an option is it can let you bet on a huge range instead of a definitive bet.
Instead of further theory lets take an example of Ashok Leyland –
This month I’m betting on the range of 116–132. So if Ashok Leyland stays between in this range I’ll make the profit.
Even if it doesn’t I shall exit the trade in the middle with half of the profit when implied volatility drops after release of budget!
We have the budget! It can give wild movement and can break our range costing us six-figure loss (as the lot size is 7000; a one-point move means 7000 INR).
So how to limit the loss?
Let’s introduce the strategy – Iron Condor.
- Short a Put Options (closer to spot); Hedge the downside by buying a put option ( away from the spot)
- Short a Call Options (closer to spot); Hedge the downside by buying a call option ( away from the pot)
It should look like this –
Now here goes my Best option trading strategy: Iron Condor –
And the Payoff Graph for Best option trading strategy: Iron Condor of Ashok Leyland looks like –
Here goes the rest of the math for our Best option trading strategy: Iron Condor –
- Breakeven Points – We shall make the profit if Ashok Leyland stays between 117 and 132.
- Max Profit Range – We shall make the profit of 20,000 INR if Ashok Leyland stays between 120 and 130.
- Max Loss Range – We shall make the loss of 15,400 INR if Ashok Leyland stays above 135 and below 115.
- Net margin needed – 2L.
- Risk:Reward = 1.5:2
Thanks to the Best option trading strategy: Iron Condor, at least we don’t have an unlimited risk but we can utilize the power of options on betting the range.