Wager Mage
Wager Mage
Photo: Karolina Grabowska
As a general rule of thumb, you may wish to consider running this strategy approximately 30-45 days from expiration to take advantage of accelerating time decay as expiration approaches. Of course, this depends on the underlying stock and market conditions such as implied volatility.
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Read More »The Strategy You can think of this strategy as simultaneously running an out-of-the-money short put spread and an out-of-the-money short call spread. Some investors consider this to be a more attractive strategy than a long condor spread with calls or puts because you receive a net credit into your account right off the bat. Typically, the stock will be halfway between strike B and strike C when you construct your spread. If the stock is not in the center at initiation, the strategy will be either bullish or bearish. The distance between strikes A and B is usually the same as the distance between strikes C and D. However, the distance between strikes B and C may vary to give you a wider sweet spot (see Options Guy’s Tips below). You want the stock price to end up somewhere between strike B and strike C at expiration. An iron condor spread has a wider sweet spot than an iron butterfly. But (as always) there’s a tradeoff. In this case, your potential profit is lower. Options Guy's Tips One advantage of this strategy is that you want all of the options to expire worthless. If that happens, you won’t have to pay any commissions to get out of your position. You may wish to consider ensuring that strike B and strike C are around one standard deviation or more away from the stock price at initiation. That will increase your probability of success. However, the further these strike prices are from the current stock price, the lower the potential profit will be from this strategy. As a general rule of thumb, you may wish to consider running this strategy approximately 30-45 days from expiration to take advantage of accelerating time decay as expiration approaches. Of course, this depends on the underlying stock and market conditions such as implied volatility. Some investors may wish to run this strategy using index options rather than options on individual stocks. That’s because historically, indexes have not been as volatile as individual stocks. Fluctuations in an index’s component stock prices tend to cancel one another out, lessening the volatility of the index as a whole.
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