Reverse Iron Condor
Buy a put spread and a call spread to profit from a big move in either direction. A defined-risk volatility strategy.
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What is a Reverse Iron Condor?
A reverse iron condor is the opposite of a regular iron condor. Instead of selling spreads on both sides, you buy them. You buy a put spread below the current price and buy a call spread above it. You pay a net debit and profit when the stock makes a big move in either direction — past either spread.
Think of it as a defined-risk volatility play. You are betting the stock will break out of a range. If it does, one of your spreads pays off. If it stays flat, both spreads lose value and you lose the debit paid.
How to Set It Up
- Buy 1 OTM put (the bear put spread leg)
- Sell 1 further OTM put (defines your cost on the downside)
- Buy 1 OTM call (the bull call spread leg)
- Sell 1 further OTM call (defines your cost on the upside)
- Same expiration for all four legs
- Strike selection: Place the long strikes where you expect the breakout to start. Use 25-35 delta for the long options. Keep both spreads the same width.
- Expiration: Match to when you expect the move. 30-60 days is typical.
The net debit is your total risk.
When to Use This Strategy
Use a reverse iron condor when:
- You expect a big move but are unsure of direction
- A major catalyst is approaching — earnings, FDA decision, economic data
- Implied volatility is relatively low and you expect it to spike
- You want defined risk on a volatility trade
- A long straddle or strangle is too expensive
The reverse iron condor is cheaper than a straddle or strangle because the short legs reduce the cost. The tradeoff is that your profit is capped by the width of the spreads.
Example Trade
Stock XYZ is trading at $100. Earnings are next week and you expect a big move.
- Buy 1 XYZ $95 put for $2.00
- Sell 1 XYZ $90 put for $0.80
- Buy 1 XYZ $105 call for $1.80
- Sell 1 XYZ $110 call for $0.70
- Net debit: ($2.00 - $0.80) + ($1.80 - $0.70) = $2.30 ($230 total)
- Max profit per side: ($5 - $2.30) x 100 = $270
- Max loss: $230
If XYZ goes to $112: The call spread is worth $5 ($500). Profit: $500 - $230 = $270. The put spread expires worthless.
If XYZ drops to $87: The put spread is worth $5 ($500). Profit: $500 - $230 = $270. The call spread expires worthless.
If XYZ stays at $100: Both spreads expire worthless. You lose the full $230.
Risk and Reward
- Max profit: (Spread width - net debit) x 100. $270 in our example. Achieved when the stock moves past either spread completely.
- Max loss: Net debit paid. $230. Occurs when the stock stays between both long strikes.
- Breakeven: Lower long strike minus portion of debit on the downside. Upper long strike plus portion of debit on the upside.
The reward-to-risk ratio in our example is about 1.2:1. Not as exciting as a straddle's unlimited profit, but the defined risk makes it easier to size and manage.
Tips and Common Mistakes
- Time decay is your enemy. Both spreads lose value each day if the stock does not move. Do not hold too long without a move.
- Enter when IV is low. If IV is already high, the debit will be expensive and you need an even bigger move.
- Consider closing the winning side early and letting the losing side expire worthless if the stock has moved sharply.
- Use wider spreads for more profit potential. $10-wide spreads cost more but have a higher max profit.
Related Strategies
- Iron Condor — the opposite trade, selling both spreads for a credit
- Long Straddle — unlimited profit potential but higher cost
- Long Strangle — similar idea with OTM options and no caps
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