Strategies · Library · Options
§2.51Volatility
Short iron condor
Buy an out-of-the-money put and call near the market and sell a further-out put and call to cut the cost, for a net debit. It profits from a large move in either direction.
- Asset class
- Options
- Held for
- To expiry
- Data
- ARCANE has part of the data
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Expects a breakout bigger than the price of the nearer options implies; rising implied volatility helps.
- Entry and exit
- Buy a put below and a call above the market, sell a lower put and a higher call, same expiry, for a debit. Hold to expiry or exit early after a big move.
- Sizing
- 1 short put, 1 long put, 1 long call, 1 short call
How it fails
- Maximum loss is the net debit, if the price ends between the two long strikes
- Gain is capped at the wing width less the debit
- Decay erodes the position if the market sits still
Data it needs
- options chain with strikes and premiums
- implied volatility
- underlying daily price
ARCANE has the underlying daily close but no options chains or implied volatilities
How ARCANE uses it
A Call that an asset moves sharply, up or down, by a date matches this view; paper only.
Needs options; the payoff depends on the size of the move.
Filed under the volatility card
Hold less after a month of high volatility and more after a calm one. The paper found this raised return per unit of risk, because volatile spells are not paid for with higher returns.
A paper plan from this card holds 5 to 63 days, stops at 2.5× the expected move and uses at most 50% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §2.51, p. 37 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.