Option Strategies
Iron Condor
Introduction
Position | Strike |
---|---|
1 far-OTM call | $A$ |
1 near-OTM call | $B, where B > underlying\ price$ |
1 near-OTM put | $C, where C < underlying\ price$ |
1 far-OTM put | $D, where C-D = A-B$ |
The iron condor can be long or short.
Long Iron Condor
The long iron condor consists of selling a far OTM call, selling a far OTM put, buying a near OTM call, and buying a near OTM put. This strategy profits from a increase in price movement (implied volatility).
Short Iron Condor
The short iron condor consists of buying a far OTM call, buying a far OTM put, selling a near ATM call, and selling a near ATM put. This strategy profits from an decrease in price movement (implied volatility) and time decay since ATM options decay sharper.
Implementation
Follow these steps to implement the long iron condor strategy:
- In the
Initialize
method, set the start date, end date, cash, and Option universe. - In the
OnData
method, select the contracts in the strategy legs. - In the
OnData
method, call theOptionStrategies.IronCondor
method and then submit the order.
private Symbol _symbol; public override void Initialize() { SetStartDate(2017, 2, 1); SetEndDate(2017, 3, 1); SetCash(500000); var option = AddOption("GOOG"); _symbol = option.Symbol; option.SetFilter(universe => universe.IncludeWeeklys().Strikes(-15, 15).Expiration(0, 40)); }
def Initialize(self) -> None: self.SetStartDate(2017, 2, 1) self.SetEndDate(2017, 3, 1) self.SetCash(500000) option = self.AddOption("GOOG") self.symbol = option.Symbol option.SetFilter(lambda universe: universe.IncludeWeeklys().Strikes(-15, 15).Expiration(0, 40))
public override void OnData(Slice slice) { if (Portfolio[_symbol.Underlying].Invested) { Liquidate(); } if (Portfolio.Invested || !IsMarketOpen(_symbol)) return; if (!slice.OptionChains.TryGetValue(_symbol, out var chain)) return; // Find put and call contracts with the farthest expiry var expiry = chain.Max(x => x.Expiry); var contracts = chain.Where(x => x.Expiry == expiry).OrderBy(x => x.Strike); var putContracts = contracts.Where(x => x.Right == OptionRight.Put).ToArray(); var callContracts = contracts.Where(x => x.Right == OptionRight.Call).ToArray(); if (putContracts.Length < 10 || putContracts.Length < 10) return; // Select the strikes in the strategy legs var farPut = putContracts[0].Strike; var nearPut = putContracts[10].Strike; var nearCall = callContracts[^10].Strike; var farCall = callContracts[^1].Strike;
def OnData(self, slice: Slice) -> None: if self.Portfolio[self.symbol.Underlying].Invested: self.Liquidate() if self.Portfolio.Invested or not self.IsMarketOpen(self.symbol): return chain = slice.OptionChains.get(self.symbol) if not chain: return # Find put and call contracts with the farthest expiry expiry = max([x.Expiry for x in chain]) chain = sorted([x for x in chain if x.Expiry == expiry], key = lambda x: x.Strike) put_contracts = [x for x in chain if x.Right == OptionRight.Put] call_contracts = [x for x in chain if x.Right == OptionRight.Call] if len(call_contracts) < 10 or len(put_contracts) < 10: return # Select the strikes in the strategy legs far_put = put_contracts[0].Strike near_put = put_contracts[10].Strike near_call = call_contracts[-10].Strike far_call = call_contracts[-1].Strike
var ironCondor = OptionStrategies.IronCondor( _symbol, farPut, nearPut, nearCall, nearPut, expiry); Buy(ironCondor, 2);
iron_condor = OptionStrategies.IronCondor( self.symbol, far_put, near_put, near_call, far_call, expiry) self.Buy(iron_condor, 2)
Strategy Payoff
The iron condor can be long or short.
Long Iron Condor
This is a limited-reward-limited-risk strategy. The payoff is
$$ \begin{array}{rcll} C^{far}_T & = & (S_T - K^C_{far})^{+}\\ C^{near}_T & = & (S_T - K^C_{near})^{+}\\ P^{far}_T & = & (K^P_{far} - S_T)^{+}\\ P^{near}_T & = & (K^P_{near} - S_T)^{+}\\ P_T & = & (C^{near}_T + P^{near}_T - C^{far}_T - P^{far}_T - C^{near}_0 - P^{near}_0 + C^{far}_0 + P^{far}_0)\times m - fee \end{array} $$ $$ \begin{array}{rcll} \textrm{where} & C^{far}_T & = & \textrm{Far OTM call value at time T}\\ & C^{near}_T & = & \textrm{Near OTM call value at time T}\\ & P^{far}_T & = & \textrm{Far OTM put value at time T}\\ & P^{near}_T & = & \textrm{Near ATM put value at time T}\\ & S_T & = & \textrm{Underlying asset price at time T}\\ & K^C_{far} & = & \textrm{Far OTM call strike price}\\ & K^C_{near} & = & \textrm{Near OTM call strike price}\\ & K^P_{far} & = & \textrm{Far OTM put strike price}\\ & K^P_{near} & = & \textrm{Near OTM put strike price}\\ & P_T & = & \textrm{Payout total at time T}\\ & C^{far}_0 & = & \textrm{Far OTM call value at position opening (credit received)}\\ & C^{near}_0 & = & \textrm{Near OTM call value at position opening (debit paid)}\\ & P^{far}_0 & = & \textrm{Far OTM put value at position opening (credit received)}\\ & P^{near}_0 & = & \textrm{Near OTM put value at position opening (debit paid)}\\ & m & = & \textrm{Contract multiplier}\\ & T & = & \textrm{Time of expiration} \end{array} $$The following chart shows the payoff at expiration:

The maximum profit is $K^C_{far} - K^C_{near} - C^{near}_0 - P^{near}_0 + C^{far}_0 + P^{far}_0$, where $K^P_{OTM} > S_T$ or $S_T > K^C_{OTM}$.
The maximum loss is the net debit paid: $C^{far}_0 + P^{far}_0 - C^{near}_0 - P^{near}_0$, where $K^P_{OTM} < S_T < K^C_{OTM}$.
If the Option is American Option, there is a risk of early assignment on the sold contracts.
Short Iron Condor
This is a limited-reward-limited-risk strategy. The payoff is
$$ \begin{array}{rcll} C^{far}_T & = & (S_T - K^C_{far})^{+}\\ C^{near}_T & = & (S_T - K^C_{near})^{+}\\ P^{far}_T & = & (K^P_{far} - S_T)^{+}\\ P^{near}_T & = & (K^P_{near} - S_T)^{+}\\ P_T & = & (C^{far}_T + P^{far}_T - C^{near}_T - P^{near}_T - C^{far}_0 - P^{far}_0 + C^{near}_0 + P^{near}_0)\times m - fee \end{array} $$ $$ \begin{array}{rcll} \textrm{where} & C^{far}_T & = & \textrm{Far OTM call value at time T}\\ & C^{near}_T & = & \textrm{Near OTM call value at time T}\\ & P^{far}_T & = & \textrm{Far OTM put value at time T}\\ & P^{near}_T & = & \textrm{Near ATM put value at time T}\\ & S_T & = & \textrm{Underlying asset price at time T}\\ & K^C_{far} & = & \textrm{Far OTM call strike price}\\ & K^C_{near} & = & \textrm{Near OTM call strike price}\\ & K^P_{far} & = & \textrm{Far OTM put strike price}\\ & K^P_{near} & = & \textrm{Near OTM put strike price}\\ & P_T & = & \textrm{Payout total at time T}\\ & C^{far}_0 & = & \textrm{Far OTM call value at position opening (credit received)}\\ & C^{near}_0 & = & \textrm{Near OTM call value at position opening (debit paid)}\\ & P^{far}_0 & = & \textrm{Far OTM put value at position opening (credit received)}\\ & P^{near}_0 & = & \textrm{Near OTM put value at position opening (debit paid)}\\ & m & = & \textrm{Contract multiplier}\\ & T & = & \textrm{Time of expiration} \end{array} $$The following chart shows the payoff at expiration:

The maximum profit is the net credit received after commission when opening the trade, where $K^P_{OTM} < S_T < K^C_{OTM}$.
The maximum loss is $K^C_{far} - K^C_{near} + C^{near}_0 + P^{near}_0 - C^{far}_0 - P^{far}_0$, where $K^P_{OTM} > S_T$ or $S_T > K^C_{OTM}$.
If the Option is American Option, there is risk of early assignment on the sold contracts.
Example
The following table shows the price details of the assets in the algorithm:
Asset | Price ($) | Strike ($) |
---|---|---|
Far-OTM call | 1.85 | 857.50 |
Far-OTM put | 2.75 | 810.00 |
Near-OTM call | 1.35 | 855.00 |
Near-OTM put | 2.15 | 815.00 |
Underlying Equity at expiration | 851.20 | - |
Therefore, the payoff is
$$ \begin{array}{rcll} C^{far}_T & = & (S_T - K^C_{far})^{+}\\ & = & (851.20-857.50)^{+}\\ & = & 0\\ C^{near}_T & = & (S_T - K^C_{near})^{+}\\ & = & (851.20-855.00)^{+}\\ & = & 0\\ P^{far}_T & = & (K^P_{far} - S_T)^{+}\\ & = & (815.00-851.20)^{+}\\ & = & 0\\ P^{near}_T & = & (K^P_{near} - S_T)^{+}\\ & = & (810.00-851.20)^{+}\\ & = & 0\\ P_T & = & (C^{near}_T + P^{near}_T - C^{far}_T - P^{far}_T - C^{near}_0 - P^{near}_0 + C^{far}_0 + P^{far}_0)\times m - fee\\ & = & (0+0-0-0+1.35+2.15-1.85-2.75)\times100-1\times4\\ & = & -114 \end{array} $$So, the strategy losses $114.
The following algorithm implements a long iron condor Option strategy: