Iron Option Strategy

 

The iron option strategy is a favorite among many option traders, including hedge funds, money managers, and individual investors. The options strategy is executed by simultaneously selling a  call spread, and  put spread. It gets its name due to the fact that the graph looks like a  spreading its wings. There are four separate strike prices executed with this strategy, all of which have the same expiration month.

In most cases, this strategy is executed right in the middle between the inner strike prices, points B and C, while the distance between puts and the calls are roughly the same.

The draw of this strategy is the more substantial net credit received for selling both an out of the money call spread and out of the money put spread at the same time, but more conservative than a straddle or strangle, as max losses are capped.

Strategy

Investors who feel the stock price will not have much movement before expiration would execute an iron , allowing the investor to collect a larger premium. symmetrical triangle In addition, the margin required to execute an iron  is the same as a single vertical spread, strangle option even though two vertical spreads are being executed here. The reason, the trader is guaranteed to win at least one side of the trade.

The iron  is a favorite options trading strategy among many options traders due to its risk versus reward possibilities. A trader that executes an iron  hopes that the underlying stock will have a narrow trading range so that the option falls between the two short strikes on expiration. long call option It can also be executed with slight bullish or bearish tendencies, depending on the range of the iron  and its relation to the stock price.

It is almost always wise to take the position off a few days before expiration to avoid any unexpected movement in the stock, which could cause a winning trade turn into a losing trade. Remember, markets can move swiftly and without warning, straddle option strategy  and although the higher the implied volatility, the higher the net credit the trader can receive, the more volatile and riskier the trade will be. For this reason, it’s always smart to understand exactly what you’re risking and how you can adjust the trade should the market move against you.

Profit/Loss

The trader starts to lose on this trade once the stock moves outside the inner short strike prices, and penetrate the call spread upper side or the put spread on the lower side. The maximum loss is calculated by taking the difference between either the call side or put side minus the premium received.  Same as a  call spread or  put spread.

The maximum win is established if the stock expires between the two short strikes, represented by point B and C on the graph above.

Breakeven

There are two breakeven points on an iron .

Upper Breakeven = short call strike + credit received

Lower breakeven – short put strike – credit received

Example

If stock XYZ is trading at $100, a trader could sell a 105-110 call spread for $1.50 net credit, while also selling a 90-95 put spread for $1.50. There the trader would receive a total premium of $3.

If the stock traded down to $96, the trader would keep the full $3 premium, and all the options would expire worthless.

If the stock traded up to $112, then the trader would lose $7 on the 105-strike price call, and gain $2 on the 110-strike price call, receiving a net loss of $5. However, because they sold this position for $3, their max loss would only be $2 ($5-$3).

Conclusion

The iron  is a favorite options strategy for investors who are predicting a neutral market. The further out of the money a trader goes, the better their chances of success, but the lower premium the trader will receive. It is best to open this strategy with 30-60 days to expiration, where time decay starts to pick up. It allows investors to enter positions with limited risk, high returns on capital, along with a high probability of success.