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Everything about Max P&L and ROI and Logistics

There are a few important things you need to remember while executing an iron condor –

  1. It is essential for the strike distribution to be even when purchasing PE and CE. In this case, 9800 PE and 10,100 CE have been sold with the protection of 9600 PE and 10,300 CE respectively. The difference between them must be equal – 200 in this instance – rather than one being 100 and the other 200.
  2. The Max loss occurs when the market moves either above 10,300 CE or below 9,600 PE.
  3. Spread = 200 i.e. the difference between the sold strike and its protective strike.
  4. Max Profit = Net premium received. In this case, it is 128.45 (9634/75)
  5. Max loss = Spread – Net premium received. In this case, it is 200 – 128.45 = 71.54.

 

  • ROI and Logistics

The premium of Rs.23,288/- you receive by establishing a short strangle is higher in terms of absolute Rupees than the Rs.9,643/- for an iron condor. However, when factoring in the margin requirement, the Iron condor has a higher return on investment.

The margin required for a short strangle trade is Rs.1,45,090/-, resulting in an ROI.

23,288/1,45,090

=16%.

The margin requirement for iron condor is Rs.44,303/-. Therefore, the ROI is –

9,643/44,303

= 21%

As a trader, focus on the ROI rather than absolute numbers. The margin benefit makes for a tangible difference.

The order of trading plays a crucial role when it comes to an iron condor. To illustrate, this is the process –

  • Buy the far OTM call option
  • Sell the OTM Call option
  • Buy the far OTM PUT
  • Sell the OTM PUT option

The idea here is to first be in a long position before starting a short one.

Why? Having a long option position reduces the margin you must pay for a short option. The system recognizes that risk is minimised, so lower margins are required.

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