Mouse Ears Iron Condor Options Strategy | Live Example On Nifty

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In this video we would be looking at a variation to the traditional Iron Condor options strategy known as the ‘Mouse Ears’ Iron Condor. But before that, let me give a quick recap about the regular Iron Condor options strategy.

Iron Condor Options Strategy:

Iron Condor is a low risk, directional neutral options strategy. That is, you do not have to be sure about the movement of the market - it can go either bearish or bullish.

It is deployed by selling two options - one OTM call and one OTM put and then by buying two more options - one further OTM call and one further OTM put, all of them being of the same underlying asset and expiry date.

All the four legs have to be entered simultaneously, that is, at the same time. Also the strike width, that is, the difference between the strike prices of the bought and sold options on either side should be the same.

Combination of two vertical spreads:

Iron Condor is a combination of two vertical spreads - a bear call spread and a bull put spread.

In this, the trader expects the underlying to be range bound in a particular price range with little movement. Low volatility and time decay are helpful to the position.

Iron Condor is a net credit trade and the maximum profit at expiry is the net credit you receive while entering the trade. The maximum profit is attained when the underlying ends in between the two short strikes.

The maximum loss at expiry is the difference between the strike prices of any of the two vertical spreads minus the net credit.

We recommend you initiate the trade with options with at least one month to expiry.

The sold options should have a delta of about 0.2 and the bought options should have a delta of about 0.1. An option with a 0.1 delta has a 10% chance of being in the money at expiration.

Calculations:

Maximum loss at expiry = Number of lots x (Difference between the strike prices of any of the two vertical spreads - Net credit) x lot size
= (3 x [300 - [(101 - 63.5) + (76.55 - 38.79)]]) x 75 = 3 x (300 - 75.26) x 75 = 3 x 224.74 x 75 = ₹50566.5

Maximum profit at expiry = Number of lots x Net credit received = 3 x [(101 - 63.5) + (76.55 - 38.79)] x 75 = ₹16933.5

Lower break even point = Short Put Strike Price - Net Credit = 8300 - [(101 - 63.5) + (76.55 - 38.79)] = 8224.74

Upper break even point = Short Call Strike Price + Net Credit = 9700 + [(101 - 63.5) + (76.55 - 38.79)] = 9775.26

Risk Graph:

It is clear from the risk graph that the strategy gives you a wide profit range and that the maximum profit at expiry is ₹16934. A maximum loss of ₹50567 is attained beyond the break even points 8225 and 9775.

Apart from the two vertical spreads we mentioned earlier in the video, there are two other vertical spreads we need to know to initiate the ‘Mouse Ears’ Iron Condor Options Strategy. They are bull call spread and bear put spread.

Mouse Ears Iron Condor Options Strategy:

The mouse ears Iron Condor is an advanced options strategy and is initiated by adding the two vertical spreads - bull call spread and bear put spread just in front of the iron condor strikes.

Risk Graph:

The strategy got its name from the shape of its risk graph, which resembles mouse ears. A maximum profit of ₹28773 is achieved if Nifty trades exactly at the strike price of the sold options. A maximum loss of ₹38727 is attained beyond the break even points 8172 and 9828.

Advantages and disadvantages:

The mouse ears Iron Condor strategy gives you a wide profit range and hence has a very good probability of profit, almost 95%.

The strategy requires more margin money and also you may have to pay more commissions (depending on your broker) as the number of options involved are more.

The premium received at the outset is more for the regular Iron Condor.

The maximum profit potential is more for the mouse ears Iron Condor strategy and the break even points too are pushed farther apart making the mouse ears Iron Condor trade less risky.

The maximum loss potential is less for the mouse ears Iron Condor strategy and when closer to expiry the trade has to pass through a peak profit zone, which is advantageous to us.

Both the strategies have a very good probability of profit (more than 90%).

Considerations:

The short strikes of the four vertical spreads that constitute the mouse ears Iron Condor should match.

While the ratio of the number of lots of the vertical spreads is 1:3 in the sample trade, you are welcome to play with other ratios as well.

Since it is a complex commission intensive trade we do not recommend you do any adjustments.

Depending on which side is threatened, the bull call spread and the bear put spread can also be deployed as an adjustment to the threatened side of an Iron Condor.