31 lines
2.0 KiB
Plaintext
31 lines
2.0 KiB
Plaintext
condor’s expiring profitable, but there are a few adjustments that need to be
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made.
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First, because with an iron condor the idea is to profit from net short
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option premium, it usually makes more sense to sell shorter-term options to
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profit from higher rates of time decay. This entails trading condors
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composed of one- or two-month options. The IV needs to be deannualized
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and converted to represent the standard deviation of the underlying at
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expiration.
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The first step is to compute the one-day standard deviation. This is found
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by dividing the implied volatility by the square root of the number of
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trading days in a year, then multiplying by the square root of the number of
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trading days until expiration. The result is the standard deviation (σ) at the
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time of expiration stated as a percent. Next, multiply that percentage by the
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price of the underlying to get the standard deviation in absolute terms.
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The formula 2 for calculating the shorter-term standard deviation is as
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follows:
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This value will be added to or subtracted from the price of the underlying
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to get the price points at which the approximate standard deviations fall.
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Consider an example using options on the Standard & Poor’s 500 Index
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(SPX). With 50 days until expiration, the SPX is at 1241 and the implied
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volatility is 23.2 percent. To find strike prices that are one standard
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deviation away from the current index price, we need to enter the values
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into the equation. We first need to know how many actual trading days are
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in the 50-day period. There are 35 business days during this particular 50-
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day period (there is one holiday and seven weekend days). We now have all
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the data we need to calculate which strikes to sell.
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The lower standard deviation is 1134.55 (1241 − 106.45) and the upper is
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1347.45 (1241 + 106.45). This means there would be about a 68 percent
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chance of SPX ending up between 1134.55 and 1347.45 at expiration. In
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this example, to have about a two-thirds chance of success, one would sell
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the 1135 puts and the 1350 calls as part of the iron condor. |