IWM Unbalanced Condor - Limited Downside Risk

On our last conference call I mentioned that I would post an example of an unbalanced Iron Condor to illustrate how we can create trades with limited downside risk in a volatile and uncertain market... or in a downtrending market like we have now.

The following trade is not a recommendation, but for Educational Purposes Only.

The unbalanced condor only has a profit probability of about 50%, but the risk of losing on the trade is all on the upside. In other words, if the market stays below the short strike of your Bear Call Spread on the top then you don't lose money.

We'll use the IWM (Russell 2000 ETF) example:

My method of creating the spread is a little bit of technical analysis and a little bit of looking at the probability of expiration. I built this trade around the resistance I see on the IWM near the 74 level. I then create a $2.00 wide spread on the top so I end up with:

Mar 74/76 Bear Call Spread > receive credit of .60 cents

I then find a bottom strike to complete the IC by finding a put spread that will pay me around .40 thus totaling a $1.00 credit for the entire Iron Condor.

To complete this spread I found the MAR 70/69 for a credit of .40

This allows us to sell the following:

MAR IWM IC 74/76/70/69 for $1.00

Notice that the exposure we have on the bottom 70/69 is $1.00 wide so if the IWM
falls down to 67 during expire week then we would lose on that position the $1.00, however since we we're paid $1.00 when we sold the Iron Condor we would break even.

If it gets completely breached to the upside the loss is $2.00 less the $1.00 credit you received, so a net loss of $1.00.

This allows us to put on a trade and not have to worry about the downside risk. If we rally in Feb and Mar to the point that the 74 short strike is breached, then you will probably want to exit the trade early for a small loss (unless you are still bearish).

Before placing a trade like this you will want to speak to an Investools Coach or Think or Swim Tradedesk person to answer any other questions you might have on the risks involved in this trade. Although the risk profile remains the same, there is a risk of early exercise of your short strike (either side) if it gets breached, but if your with Think or Swim, they can help you close the position out for a few pennies.

You will also want to close this position out at least 4 days before expiration to avoid gamma risk and assignment at expiry.

Again, this is a low probability trade, but the risk / reward is 1:1 so if the market continues to chop around for the next 8 weeks you will likely make money, and if the market tanks you'll still break-even. I don't go to heavy on these trades near bottoms like this, but while the possibility exists for another move down in a downtrending market it's a great way to minimize downside risk.

IWM IC Example: (For Educational Purposes Only)