Iron Condor Trade
Iron Condor Trade
In this excerpt from our options mentoring course, Morris gives us some insight on understanding the difference between the leg widths of the Iron Condor Trade.
Morris is the founder of San Jose Options.
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10-point spread over here. You have a couple contracts, this point and this point that are pretty close together. Their decay rate is similar ‘cause they’re not too far apart. On this one though, as you get wider, you end up having quite a substantial change in the actual decay rates of the contracts. What happens is the farther you go out of the money until you get to a point where it just doesn’t decay anymore, the decay rate increases.
Over here, what happens is you have a much lower price. Let’s say here you have $2 but over here, if it’s so wide, you might have like 20 cents or something. This one, it may appear to have a lower theta but the actual theta amount that it’s decaying per day is much higher so you have a higher decay rate. Let’s look at, for example, the put chain and I’ll just draw like a line and then we’ll say at the money is over here. Then you have, let’s say, out of the money over here. Your decay rate is way higher so you’ll have something that looks like this; this type of graph.
It’s interesting because if you look at a theta chart, it would look backwards. If you do the similar thing and then you would have an increasing theta as you go towards the money and then it would actually go back down ‘cause your theta’s highest at the money. You’d have that kind of graph. But if you actually study the decay rate and you could do this manually, just go to the option chain and take your theta and put that over, just go like theta, and then put it over the option price and you’ll see...