Unbalanced iron condors are only slightly different than a regular (or balanced) iron condor. These strategies are best used when you want to be slightly directional in your setup but also want the ability to profit if the stock remains range bound. To build these condors and create skew to one side you simply widen out your strikes on one side of the trade. Take your time with understanding skew. For example, a stock is trading at $50 and you wanted to skew your strategy towards the bullish side. You would widen out your strikes on the put side. Maybe instead of selling the $45/44 puts you sell the $45/40 puts. This creates more risk on the lower side of the trade therefore removing risk on the top side (bullish skew). You would do the opposite to get bearish skew, widening out your call strikes.
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In today's video, I want to talk about creating unbalanced iron condors. Unbalanced iron condors are only slightly different than a regular or “balanced iron condor.”
These strategies are best used when you want to be slightly directional in your setup, but you also want the ability to profit if the stock remains range-bound, so you want the best of both worlds.
It’s a fairly neutral strategy, but you can get a little bit directional with it. So, to build these condors and create skew to one side, you just need to widen out your strikes on the other side of the trade.
Again, if you want to create skew to the bottom side of your trade, you would widen out the strikes on the topside. If you want to create skew to the topside or the call side, you widen out the strikes on the bottom side or the put side. Take your time in understanding these, and hopefully, this video is going to be a great guide for you.
In our case, if we wanted to setup a strategy where we were skewing our position to the topside, what we would do is we would sell an out of the money put.
We would then buy an out of the money put that's at two times wider strike than the following two trades that we’re going to make which is selling an out of the money call and buying one out of the money call one strike higher.
Whatever the width of the strikes is on the call side, you’re going to do just a little bit wider, maybe two times wider on the put side, so that you have a little bit more risk on the put side.
We're going to skew it to the topside, and you can see that’s where we get that dotted line here on the profit loss diagram from a regular iron condor which is that red solid line to that dotted line which is just a little bit more skewed to the topside of the market.
What’s the risk? Well, your risk is limited to the width of the widest strikes on either end. In this case, we’ll use an example where we have a $2 wide width less the credit that you received.
If you took in an $80 credit, then your maximum risk would be only $1.20. Should the stock remain neutral in trading at the short strikes, you could make at most the net credit received from entering the trade.
That's ideally what we want to see happen, is still the stock trade in between those short strikes that we sold on either end. But if it does move outside of that range, then we have the potential to lose depending on which side it moves to.
An increase in implied volatility has a negative impact on this strategy everything else being equal and that’s because we’re short two credit call spreads on either side of the market. We ideally want to see implied volatility drop.
This is why we said at the beginning of this video tutorial that it's important that we add these strategies when implied volatility is very high. The passage of time does help this position. Theta decay is going to help us since we’re net sellers of the option premium.
The closer we get to expiration, the faster a profit will start to materialize. As far as breakeven points, they’re pretty easy to calculate. We’re going to take the short at the money strikes on either end and add or subtract the credit that we received to get our breakeven points.
Again, there are two breakeven points on these strategies. If you want to calculate the higher breakeven point, then you take the short at the money strike of the call spread, add the credit that we received.
If you want to calculate the lower breakeven point, you’d take the short at the money strike of the put spread and subtract the credit that we received. That’s exactly how you get both of those breakeven points.
We’re going to go ahead and build one these strategies right now in our broker platform in Thinkorswim. We’re going to build it two different ways, and we’ll show you what the chart looks like first.
This is a chart of SLV. SLV is a silver ETF, and it’s got currently very, very high implied volatility up in the 71st percentile. You can see graphically down here that implied volatility is here, so going back historically, this is pretty high over the last year.
It’s been high relatively of late, but right now, it's very high as far as implied volatility is concerned, so that meets that requirement for this trade.
We want to be fairly neutral to this trade, but we are going to play it either way, and I’ll show you how you can play it directionally bullish or directionally bearish.
The first way that we’re going to do it is we're going to play it directionally bullish. In this case, we’ll sell these 16/14 put spread below the market, and that’s going to be our $2 wide side of the trade.
You can see here that our 16/14 position has a $2 wide width in strikes and we’re going to take in a nice healthy credit of $.21 to do that. On the topside, we’re going to be a little bit more conservative and just have the 19/20 call spread above the market.
We’ll just adjust our strikes to 19/20, and you can see that that’s only a $1 wide spread. Since we have a wider spread below the market, this gives us a little bit of a bullish tilt to this strategy.
Here's what the profit loss diagram looks like. You can see that it's an unbalanced iron condor because we lose a little bit less money on the right side of this payoff diagram as the stock continues to move higher. This is our 1 point wide side.
Here, the spreads are just 1 point wide and below; the spreads are 2 points wide. You can see we’re fairly neutral. We still want the stock to trade between about 16 and 19, but we have more risk to this side of the trade because we have wider strike prices.
We can do completely the opposite here. We can narrow the width of the strikes on the put side, so I’ll just do that right now. We’ll do the 16/15. This is what a regular iron condor would look like. On the topside, we can widen this out to the 19/21.
In this case, we widened it out to the 19/21, now we have less risk to the downside, and we take more risk to the topside of the trade. This is where our $2 wide strikes are, and this is where our $1 wide strikes are. We still want the stock to trade between about 16 and 19, and now most of our risk is to the opposite side.
It’s unbalanced with most of the risk higher and less of the risk lower. It’s a cool strategy, very easy to setup. We like doing these, and we’ve currently got a trade right now in SLV that mimics this exact strategy that you see here.
We’re getting this thing and being a little bit directionally bearish on it because we think the rally up has been a little bit too far too fast and we want to take this trade just a little bit directionally bearish.
Alright, as far as key takeaways here, skewing an iron condor is a great way to make a fairly neutral position. But reduce risk on one side of the market especially if you feel like it could have a big move in one direction versus another.
Again, this allows you to also play the market slightly directionally against the area of higher risk which is a key distinguishing point here, but you do take a little bit more risk on the other side, so just be aware of that.
Always analyze your trades before you place the actual orders. As always, I hope you guys enjoy these videos. If you have any comments or questions, please add them right below on the lesson page. Until next time, happy trading!