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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 sold put option of the bull put spread.
If upon expiration, the spot price of the underlying asset trades beyond this range, users would start making a loss on their initial deposits but still earn premiums from running both spreads.
The max loss for the iron condor is the initial deposit less profits from the option premiums. The max profits from running the iron condor in the combined max profits of running both spreads.

Benefits

The 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 or put option, the iron condor would provide nearly 2x the yield of a single call or put spread.

Who uses Flat Iron Condor?

The flat iron condor is ideal for users who are short-term neutral or slight bullish on the underlying asset. The user would expect that the underlying asset would trade within a range during the epoch cycle.

Risk Parameters

In Thetanuts's case, the iron condor would be selling both bull put spreads and bear call spreads with a 5 net delta exposure respectively. Please read here for more information about delta.
Strikes are selected based on these parameters at 0900 UTC on Fridays, when auctions are conducted.

Understanding the Risk-Reward Profile

There are 3 main scenarios when considering using the flat iron condor strategy. To illustrate these scenarios, these are the parameters:
  1. 1.
    The initial spot price of ETH is $2,000
  2. 2.
    A user deposits $1,000 USDC into the bull put spread vault.
  3. 3.
    The strike price range of the sold put and call option is $1,900 - $2,100
  4. 4.
    The strike price range of the bought put and call option is $1,800 - $2,200
  5. 5.
    The weekly yield of the flat iron condor is 30% ($300)
Scenario 1: The spot price of ETH is within the strike price range of the sold put and call option upon expiry.
  1. 1.
    Both the bear call and bull put spreads expires worthless and the user would retain his/her initial deposit while earning the weekly yield of $300
  2. 2.
    New Net Position: $1000 (initial deposit) + $300 (weekly yield) = $1,300
Scenario 2: The spot price of ETH exceeds the strike price range of the sold put and call option but within the strike price range of the bought put and call option upon expiry.
  1. 1.
    If the spot price of ETH goes up to $2,150. The bear call spread is partially exercised while the bull put spread expires worthless.
  2. 2.
    If the spot price of ETH goes down to $1,850. The bull put spread is partially exercised while the bear call spread expires worthless.
  3. 3.
    In both of these types of price movements, the user would lose part of his/her initial deposit while earning the weekly yield of $300.
  4. 4.
    New Net Position: -$1,000 (initial deposit) x 50% + $300 (weekly yield) = - $200
Scenario 3: The spot price of ETH exceeds the strike price range of the bought put and call option upon expiry.
  1. 1.
    If the spot price of ETH goes up to $2,300, the bear call spread is fully exercised while the bull put spread expires worthless
  2. 2.
    If the spot price of ETH goes down to $1,700, the bull put spread is fully exercised while the bear call spread expires worthless
  3. 3.
    In both of these types of price movements, the user would lose all of his/her initial deposit while earning the weekly yield of $300.
  4. 4.
    New Net Position: -$1,000 (initial deposit) + $300 (weekly yield) = - $700