Short Strangle VS Iron Condor - Which Is Better? - YouTube

Hey everyone!

Welcome to another video lesson from NavigationTrading.

In this video I want to talk to you about the difference between a short strangle and

an iron condor, and the question that we get a lot from our members is, when do I trade

the short strangle, and when do I trade the iron condor?

Because they are very similar trades.

And that's what I want to break down.

And so let's start with a little bit of a comparison, and then we'll jump onto the trading

platform and show some actual examples.

So to start with, when we put on either a short strangle or an iron condor, we do both

in a market neutral fashion.

Meaning, we don't care if the underlying stock goes up or down, we just want it to stay in

a specific range.

So that's the same for both.

Also, when we enter these, we're entering with high implied volatility.

So we want to sell a short strangle, we want to sell an iron condor, when implied volatility

is high.

So that's the same for both.

Now is where we get into some of the differences.

First off the risk.

In a short strangle, the risk is undefined.

We're using naked options, which sometimes can make people nervous.

But I'll show you what the difference is and why that's important.

And then with an iron condor, the risk is defined.

So you know exactly what you're risking on the trade when you enter it.

Next is the probability of profit.

When you enter a short strangle based on the way that we teach in our courses, the probability

of profit is typically around 70% or higher with a short strangle, where the probability

of profit is a little bit lower with the iron condo at about 60%.

So you have a higher chance of making money with a strangle then you do an iron condor.

Next is the profit potential.

When you sell a strangle, typically you're collecting more credit, giving you a higher

profit potential.

With an iron condor, you're collecting less credit so your profit potential is a little

bit lower.

As far as where you can trade, short strangles traditionally have been uneligible for IRA's.

However, tastyworks has come out with the ability to trade naked positions in your IRA.

So if you do have tastyworks as your broker, and they are one of our preferred brokers,

then you can trade them in an IRA.

And then iron condors for the most part across any broker can be traded in an IRA.

Next is our permission levels.

So when you apply for an account and you open an account at a brokerage, you have to get

permission to trade certain levels.

With a short strangle, you have to have what's called tier three permissions to trade naked

options.

And with iron condors you just have to have tier two permissions, so that you can trade

defined risk spreads.

And lastly, with short strangles, you're gonna use a larger amount of capital.

Whereas with an iron condor, you can play smaller trades that use less capital.

So those are some of the differences.

Let's go to the platform and tie this all together to make sure it makes sense.

So I'm gonna look at two different underlying symbols.

The first one we're looking at is SPX.

And if you're in thinkorswim platform, we like to use our analyze tab because I'm a

very visual person, and I know a lot of our members are as well, so it helps kind of introduce

the concepts, and helps you grasp the concepts a little better.

So what I've done here is I have put together a short strangle to begin with.

And you can see down here I've checked on just the short strangle box.

So, that's what we're looking at.

If you look at the break evens we put on the price license at the break even point of the

zero line, what you'll see is that in this case, the probability of profit, if you held

it all the way to expiration is a little over 63%.

So it's a little lower than the 70% that we talked about.

But what I want you to take away from this is that you've got a profit potential with

one contract of $2,660, which you can see in the teal colored in the little black box

over here to the left.

So remember that number 2,660, that's our max profit.

Now, if we uncheck the strangle box, and we check the iron condor, now you'll see what

happens.

A couple of things.

One, we've got defined risk.

You can see these wings on either side, meaning if price explodes to the upside, or crashes

to the downside, we have this defined risk amount.

The profit potential, as you can see, if you're still looking at that teal number down in

the bottom left, is $735.

So our profit potential is less than a third that of a strangle, so our profit potential

is lower.

But what we get in return is that defined risk.

So if you're nervous about undefined risk, you can define the risk by buying these wings

and trading in iron condor.

The other thing I want to point out is, look at our price license.

They're way out here, however we have to move them into the break even points for the iron

condor.

So let's just move those in and see what that does to the probabilities.

You can see that went from over 63% probability down to 55.

Okay, so remember I told you, you have a lower probability of profit with an iron condor,

whereas the short strangle has a higher probability, and a higher profit potential, but you're

looking at undefined risk.

So there's always a trade off between risk and reward, and it's not that there's one

that's better than the other.

A short strangle is not better than an iron condor.

It's just dependent on what you are looking to trade from a capital usage, from a defined

risk, the type of trading account you have, and so forth.

The one last thing I want to show you on this example is, if we right click on the iron

condor, hit confirm and send, it will bring up this box showing what our buying power

effect is.

So it's going to cost us $2,269 of buying power to put on the iron condor trade.

So let's exit out of that, and let's look at what the difference is with the short strangle.

So if we right click, hit confirm and send, with one contract for a short strangle, we

would have to put up over $49,000.

Okay?

So I don't care if you're trading a six figure, seven figure account, trading a short strangle

in SPX, which is currently trading at nearly $2,900, it's just really not an efficient

use of your capital.

So if you're trading extremely high priced underlying symbols like SPX, then you're typically

going to trade an iron condor.

You're going to define the risk, as well as it's just a more efficient use of your capital.

So those were the different things you look at.

The price of the symbol, your trading permissions, the probability of profit, your max potential

profit, your defined versus undefined risk.

And those all are the things that you want to take into consideration when choosing which

to trade.

Let's go to one more example, and let's take a look at EWZ, which is the Brazilian ETF.

Now look at the difference in price of what these symbols are trading at.

SPX is trading at nearly 2,900 at the time of this recording, and EWZ is trading at a

little over $32 a share.

Okay?

So that's a massive difference, right?

So let's take a look at the analyze tab here and see what the difference is.

Let me change this to match up with our expiration date, which is 10/20, so we get some accurate

readings.

So, let's look at the iron condor first, and what you'll see is that we've got a probability

of profit of about 68%.

That's good.

We've got our defined risk wings as you can see here.

So the max risk with one contract is just a $136.

This can be done in really any size account, small accounts, large accounts, it doesn't

matter.

And again, we're just looking at one contract.

So we've got a defined risk max loss of 136, a max potential profit of $64.

Okay?

So the lower the price of the symbol, the less capital you're going to use, and the

lower potential profit you're going to have as well.

Now, let's look at the short strangle.

So if we click on that, what you'll see is our break evens have widened out, so we need

to move our price license to get an accurate reading here.

And move it over here.

And then what you'll see is, now look at our probability of profit.

It jumped up to 74%.

So remember, on a short strangle, you have a higher probability of profit.

And now look at our max profit potential with the teal number down here in the box is $130.

So now we have a much higher profit potential, about three times the credit, about three

times the profit potential, with the short strangle versus the iron condor.

And of course with that comes undefined risk.

Which, if you've taken our courses, you know that there are ways to mitigate that risk,

and minimize that risk even when you're trading undefined strategies.

Okay, so lastly, let's do the same thing as we did with SPX.

Let's go down and take a look at what the buying power would be.

Let's start with a short strangle.

We can right click, hit confirm and send, and you'll see, for even for a short strangle

with undefined risk, the buying power effect, the amount of capital it takes to put this

trade on, is a little over $326.

Okay?

So not too bad.

Now of course if we go to the iron condor, it's going to be even less, hit confirm and

send.

And the buying power it takes is $161.50.

Okay?

So you can see the difference between the two.

There's not a right way or a wrong way to do this.

The only thing you got to make sure of, is it an efficient use of capital?

Are you collecting the amount of credit that you want to trade?

So for example, one of the things that we shy away from his trading iron condors on

these low price symbols, because if you look, I mean the max profit we can make with this

on one contract is $64.

Remember with an iron condor, it's four different legs.

You've got four different options you're trading.

So you've got to pay commissions on each one of those as well.

So it's a little bit higher transaction costs.

Whereas a strangle is only two contracts, so you're paying less transaction costs, entering

the trade and exiting the trade.

So, you want to take that into consideration, and understand, if you're gonna trade an iron

condor, just make sure the amount of credit you're receiving is worth the risk, and the

transaction costs involved with the trade.

So those are kinda two different extreme examples.

One of a very high priced symbol at $2,900, one at a very low priced symbol at $32.

And the difference between the two.

So let's go back to the slides and recap this one more time, and kind of give you some takeaways.

Give you your decision making criteria for choosing a short strangle versus an iron condor.

One, do you prefer defined or undefined risk?

Are you okay with that unlimited risk component, or are you more comfortable with defined risk?

If you're more comfortable with defined risk, you want to go with the iron condor.

With undefined risk, you want to go with the short strangle.

Is it the best use of capital?

So if you're trading a high priced underlying like SPX, or Amazon, or something that's very

high priced, you're probably gonna use an iron condor, because it's just a better use

of capital.

But on some of these lower price symbols, you may opt to use a short strangle because

you're not using too much buying power, and you're getting a better credit.

So the symbol price comes into that account as well.

And lastly, what type of account are you trading?

Do you have the capability to trade undefined risk if you're in an IRA versus a margin account?

If you're in an IRA, a lot of times most brokers only allow you to trade iron condors, and

you can't trade undefined risk or short strangle.

So, depends on your account type as well.

So, that's it.

I hope that was helpful in helping you determine which is better for you, a short strangle

or an iron condor.

Talk to you in the next lesson.