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# Iron Condors and Vertical Skew

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Member D. S. posed the following question:

For the newer traders out there, let’s review the different approaches he’s talking about. One way to think about an iron condor is as the sum of a short strangle and a long strangle. So the construction of an iron condor involves two steps: in the first step, we want to sell a short out of the money strangle, and the primary decision here is which strikes to choose, i.e., how far out of the money should we go? That’s an important question in itself, but it’s not the topic here. The second step is to buy a long further out of the money strangle in order to hedge the risk in our short position.  In most cases we want the long call and long put to be equidistant from the short call and short put that they’re hedging; but, as D.S. identifies, it’s not necessary that the long strangle be one strike outside the short strangle.

On first glance, it really doesn’t matter where those long strikes are: if you want to risk a particular amount on the trade, it doesn’t matter whether the distance between your short and long calls (or short and long puts) is \$2 or \$10, provided you adjust the number of contracts traded accordingly.  For example, with IWM at 51.61, let’s say we wanted to trade an iron condor with short strikes at 46 and 56, meaning we’re selling the 46 puts and selling the 56 calls. Now, if we were opting for a one-strike range, we’d obviously buy the 45 puts and the 57 calls; if, as D.S. suggests, we wanted to use a ten point range, we’d buy the 36 puts and the 66 calls.  Here’s what those two trades might look like:

+1 IWM 45 put    +1 IWM 36 put
-1 IWM 46 put    -1 IWM 46 put
-1 IWM 56 call    -1 IWM 56 call
+1 IWM 57 call    +1 IWM 66 call
\$0.29 credit        \$0.98 credit