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Flat Iron Condor

Summary

A flat iron condor is an options strategy where Thetanuts runs a bear call and bull put spread simultaneously. The goal of the flat iron condor is for the spot price of the underlying asset to expire worthless below the strike price of the sold call option of the bear call spread and above the strike price of the bull put option spread. Before using this strategy, it is recommended for users to read how Thetanut’s degen vaults work. Please click here to find out more.

Benefits

The flat iron condor allows users to be capital efficient by having a single deposit collateralizing 2 ranges, the call and put spread simultaneously. This is because if the spot price of the underlying asset trades beyond the range of either the bought call or put option, only 1 spread incurs a loss. If the spot price of the underlying asset trades between the range of the sold call and put option, the iron condor would provide nearly 2x the yield of a single call or put spread.

When to use the flat iron condor?

The flat iron condor is ideal for users who have the market view that the underlying asset is in a tight sideways market.

Understanding the risks and rewards:

There are 3 main scenarios when considering using the flat iron condor. To illustrate these scenarios, these are the parameters:
  1. 1.
    The initial spot price of ETH is $1,200
  2. 2.
    A user deposits $1,000 USDC into the flat iron condor
  3. 3.
    The strike prices of the bear call spread leg are $1,300 short call and $1,350 long call option
  4. 4.
    The strike prices of the bull put spread leg are $1,100 short put and $1,050 long put option
  5. 5.
    The weekly yield is 30% ($300)

Scenario 1:

If the settlement price of ETH remains between the sold put and call option range of $1,100 to $1,300
  1. 1.
    The put and call options expire worthless
  2. 2.
    Weekly profit = Weekly yield = $150
  3. 3.
    Post settlement balance = $1,000 (deposit) + $300 (weekly profit) = $1,300

Scenario 2:

If the settlement price of ETH results in either short option getting exercised but not the corresponding long option, a partial loss will be incurred on the deposit. If this loss is more than the weekly yield value, then the weekly profit will be at a loss and the post-settlement balance will be lower than the deposited amount.
If the settlement price of ETH is $1,325
  1. 1.
    The put options in the bull put spread expires worthless.
  2. 2.
    The short call option is exercised while the long call option expires worthless in the bear call spread
  3. 3.
    Partial loss incurred on the deposit at the bear call spread leg = ((settlement price - short call strike price) / (long call strike price - short call strike price)) x deposit x -1 = (($1,325 - $1,300) / ($1350 - $1300)) x $1,000 x -1 =($25/$50) x $1,000 x -1 = - $500
  4. 4.
    Weekly profit = weekly yield + partial loss =$300 - $500 = - $200
  5. 5.
    Post settlement balance = $1,000 (deposit) - $200(Weekly profit) = $800
If the settlement price of ETH is $1,075
  1. 1.
    The call options in the bear call spread expires worthless.
  2. 2.
    The short put option is exercised while the long put option expires worthless in the bull put spread
  3. 3.
    Partial loss incurred on the deposit = ((short put strike price - settlement price) / (short put strike price - long put strike price)) x deposit x -1 = (($1,100 - $1,075) / ($1,100 - $1,050)) x $1,000 x -1 = ($25/$50) x $1,000 x -1 = -$500
  4. 4.
    Weekly profit = weekly yield + partial loss = $300 - $500 = - $200
  5. 5.
    Post settlement balance = $1,000 (deposit) - $200(Weekly profit) = $800

Scenario 3:

If the settlement price of ETH results in both options on either leg to be exercised, a 100% loss will be incurred on the deposited amount. As this loss is greater than the weekly yield value, the post-settlement balance will be lower than the original balance.
If the settlement price of ETH increases beyond $1,350:
  1. 1.
    Post settlement balance = $1,000 (deposit) - $700(weekly profit) = $300 = - $700 = $300 - $1,000
  2. 2.
    Both put options in the bull put spread expires worthless
  3. 3.
    Both call options in the bear call spread are exercised
  4. 4.
    A full loss on the deposit is incurred at the bear call spread leg
  5. 5.
    Weekly profit = weekly yield + full loss
If the settlement price of ETH increases beyond $1,050:
  1. 1.
    Both call options in the bear call spread expire worthless
  2. 2.
    Both put options in the bull put spread are exercised
  3. 3.
    A full loss on the deposit is incurred at the bull put spread leg
  4. 4.
    Weekly profit = weekly yield + full loss = $300 - $1,000 = - $700
  5. 5.
    Post settlement balance = $1,000 (deposit) - $700(Weekly profit) = $300
Last modified 1mo ago