Market Overview

Simulated Strangle (Wider Strike Iron Condor)

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A trader who may like to write strangles for income trades and get the most premium in regular account’s will find that they can’t do these types of trades in their IRA,s.

The put side is basically cash secured and in the event the stock drops thru that strike, stock will be put to you at expiration. The call side however is considered unlimited risk (since a stock can theoretically go up to infinity) and thus in a IRA, is generally not allowed as a trade.

One way a trader can simulate writing a strangle is by widening the strikes. You can find your short strikes to sell based on whatever criteria you use and then buying a call and put several strikes out paying much less for them than a normal iron condor.

Your overall risk is less than a strangle would be but more than the normal iron condor  that you would write thus giving you something in between.

Premiums and risk differ on these trades with the most from the outright strangle and the least from the iron condor (strikes are closer) with the wider condor giving you something in between.

Below is a screenshot of an options table for the SPY March 2014 option series and we will go out to around a .20 delta for the short strikes. Let’s look at the different premiums we can receive on these three different trades, the mid price of each bid/ask was used.

Strangle :      Sell 186/171  call/put          premium per contract   $1.86

Iron Condor:   186/187 calls   and  171/170  puts     premium per contract $.30 cents

Wider strike Iron Condor:   186/196 calls  and   171/161 puts     premium per contract $1.38

As you can see the wider strikes can give you more premium than a regular iron condor and define your risk versus a strangle which then gives you a premium somewhere in between.  A screen shot of strike prices is shown for reference from the close on Friday 2-7-14 from TD Ameritrades TOS platform.

 

 

A trader can widen the strikes according to their risk parameters and premium they wish to receive along with the number of contracts to trade. This works well on stocks or ETF’s that have very liquid options to be able to go out farther with the strikes.

A trade of this type can work well in both types of accounts so keep this in mind next time you decide to write an iron condor.

 

For more information and trade ideas on options, visit my website:  www.marketfy.com/product/options-scout

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted in: Options Markets Trading Ideas