AAPL is currently trading at ~115. I can construct the following Iron Condor that expires tomorrow. It has close to a 1:1 R/R ratio:





If the stock has been range trading, there are no new events coming, and volatility makes it unlikely to move more than 5 points in 1 day then I ask:

Where can this go wrong?

What am I missing?

  • 1
    I think you should add the specific option premiums to your question.
    – Flux
    Oct 29 '20 at 23:04

Some brokers present the midpoint as current price and that is a misrepresentation. I doubt that you can achieve a 1:1 R/R ratio if you are using the respective bid and ask prices.

Be that as it may, this is a high probability trade for a small profit.

Where can this really go wrong? AAPL moves almost 5 points and you think that your short option is going to expire worthless. AAPL then moves a bit more during after hours and you're now ITM and you are assigned. Unfortunately, your protective leg has expired and Monday morning you have directional exposure since you're now long (or short) the shares.

  • Thanks for the response. So what if I buy both the spreads back for a small profit prior to the Friday close - does this not mitigate the risk of either of the short options being exercised?
    – cardycakes
    Oct 30 '20 at 7:45
  • Yes, buying both the spreads would "mitigate the risk of either of the short options being exercised". However, that would add slippage due to 4 additional transactions. In addition, if the underlying was near the short strike, that short leg would have time value until the vary last moments before option trading ceased at the close. I'm not negating the idea, just pointing out the issues involved. You should paper trade this on a number of different well known stocks for a period of time to see actual performance long term. That's proof of concept. Oct 30 '20 at 12:17
  • Thanks Bob this is really helpful and don't think for one minute you are negating the idea (or would have a problem if you were). I'm looking at different strategies and sometimes come across pricing that seems a little too good to be true and therefore try to falsify it. I do believe my (paper) broker uses real bids and asks and not the midpoint.
    – cardycakes
    Oct 30 '20 at 13:36
  • Ironically, AAPL is down $6 right now to $109 which is your maximum loss point. The condor is worth 50 cents or about break even. So it's decision time right now. Do you walk away for break even or do you hope for a rise above $110 so that you can make your 50 cents? AFAIC overnight risk is different than intraday risk so you might consider selling these on Thursday morning and deciding by 4 PM whether to hold overnight or adjust the position if there has been some movement in AAPL toward but not to a short strike. Oct 30 '20 at 13:57
  • Can't you protect against the possible Monday morning directional exposure by buying longer-expiry protective options before the weekend?
    – Flux
    Oct 31 '20 at 12:23

I have been doing this for some months, every week, and it works fine - until it doesn't. One sudden surprise movement of a stock will cost you what you made in ten successful deals.

Basically, you are playing a version of a reverse lottery: take as many tickets as you want, each comes with a dollar you can keep, and if you have the losing ticket, you pay a huge sum.

  • I suspect that either you're executing a different strategy than the OP spelled out or you don't understand what he he is suggesting. For the one day Iron Condor that he described, the maximum risk is $1.00 less the premium received. If he receives a 50 cent credit per his claim then the worst case scenario is a 50 cent loss. So there is no reverse lottery nor is there huge sum to be paid if you "have the losing ticket." At worst, it costs you one deal (assuming he closes the position rather than risking the pin risk lottery if the underlying is near the short strike at expiration). Oct 31 '20 at 12:48
  • The '1$' risk is really times 100 (options are for 100 shares). And I assumed he would be buying more than one option, otherwise he makes literally only pennies.
    – Aganju
    Oct 31 '20 at 13:38
  • Stating the basic mechanics of how the option multiplier works does not change the R/R of the strategy posed. Nor does the number of contracts purchased. The mirror image of your statement - The '1$' risk is really times 100 (options are for 100 shares) - is that the reward is 100 times the credit received. Therefore if he receives a 50 cent credit for selling the Iron Condor and he has a $1 maximum loss on the spread then he can make a maximum of $50 or he can lose a maximum of $50. IOW, he has a 1:1 Risk/Reward scenario. Oct 31 '20 at 13:57
  • @BobBaerker is right, your answer is not in-line with what I described in my question.
    – cardycakes
    Nov 10 '20 at 20:57

Where can this go wrong?

Tim Cook announces he has pancreatic cancer and is stepping down. (When Jobs did that, as the link notes, the stock dropped 6% - precisely enough to be at the worst loss point for this trade, if it happened from 115 to 109.)

Or, perhaps in the actual real world example...

Apple stock drops from 115 to 108 on 10/30/2020, due to disappointing, if unsurprising, earnings.

5%-6% is just not that much for a stock to move in one day. Yes, it won't do that often, but it will happen.

  • Thanks for the answer. Actually the things you have described aren't what I was looking for in terms of "what could go wrong", as one would expect moves that would eat into or reach maximum loss a given % of the time.
    – cardycakes
    Nov 10 '20 at 20:58

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