Advanced Option Strategies: Iron Condor, Calendar & Ratio Spreads Explained – CapitalKeeper
By CapitalKeeper | Beginner’s Guide | Indian Equities | Episode 7 Day-3
Day 3: Advanced Option Strategies for Risk Control
Objective
Learn advanced strategies like Iron Condor, Calendar Spread, and Ratio Spread that allow traders to manage risk, enhance returns, and adapt to different market conditions.
1. Iron Condor Strategy
What It Is:
The Iron Condor is a neutral options strategy that profits when the underlying asset stays within a defined price range. It combines a bull put spread and a bear call spread, creating two profit zones.
Setup:
- Sell 1 out-of-the-money (OTM) put.
- Buy 1 further OTM put (lower strike).
- Sell 1 OTM call.
- Buy 1 further OTM call (higher strike).
Market Condition:
- Best for low volatility markets where the stock is expected to trade sideways.
Pros:
- Limited risk and limited reward.
- High probability of success in range-bound markets.
Cons:
- Profits are capped.
- Requires good monitoring of support and resistance levels.
2. Calendar Spread (Time Spread)
What It Is:
A Calendar Spread involves buying a long-dated option and selling a near-term option with the same strike price. The idea is to benefit from time decay of the short-term option while keeping exposure to long-term movement.
Setup:
- Buy 1 call (or put) with longer expiry.
- Sell 1 call (or put) with nearer expiry (same strike).
Market Condition:
- Ideal for stocks expected to stay near strike price in the short term but may move in the long term.
Pros:
- Exploits time decay (theta) effectively.
- Lower initial capital requirement than directional trades.
Cons:
- Profits depend on volatility changes.
- Requires precise strike and expiry selection.
3. Ratio Spread
What It Is:
A Ratio Spread involves buying one option and selling multiple options of the same type (calls or puts) at different strikes. Common ratio is 1:2.
Setup:
- Buy 1 ATM call.
- Sell 2 OTM calls (higher strike).
Market Condition:
- Suitable when moderate directional move is expected.
Pros:
- Generates credit (net premium received).
- Can benefit from sideways to slightly bullish/bearish moves.
Cons:
- Risk is unlimited if price moves sharply beyond sold strikes.
- Complex risk management required.
When to Use These Strategies?
- Iron Condor: When expecting sideways movement with low volatility (e.g., range-bound Nifty).
- Calendar Spread: When short-term stagnation but long-term trend is expected.
- Ratio Spread: When moderate move expected in a defined direction (bullish/bearish).
Risk Management Tips
- Always define max loss before entering.
- Monitor Greeks: Delta, Theta, Vega for time and volatility impact.
- Avoid holding naked positions beyond comfort.
- Use stop-loss orders or hedge with additional options if volatility spikes.
Real Market Example (Nifty 50)
- Suppose Nifty 50 at 24,700 with low volatility:
- Iron Condor: Sell 24,800 call & 24,600 put; Buy 25,000 call & 24,400 put.
- If expecting sideways for 2 weeks, Calendar Spread at 24,700 strike could benefit from theta decay of near-month option.
- If expecting slight bullish move, Ratio Spread using 1 ATM call (24,700) and 2 OTM calls (25,200) could provide high ROI but higher risk.
Key Takeaways
- Advanced strategies are crucial for risk-adjusted returns.
- Not suitable for beginners—understand Greeks and volatility first.
- Always backtest strategies before live execution.
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