Iron Albatross Spread is an advanced yet popular options trading strategy for neutral market conditions.
It is a complex trading strategy that is never recommended for beginners where traders make use of four different transactions to create a credit spread.
This falls within the larger group of trading strategies called the wing spreads trading. The trading methods like iron albatross spread are categorized under the wing spreads largely due to the structure of the trading graph.
This options trading method is beneficial for traders who can expect no significant upward or downward movement in the price of the underlying asset.
What is Iron Albatross Spread?
As introduced, it is a complex neutral trading strategy that is much similar to strategies like iron butterfly spread and iron condor spread. The complexity of the method lies in the four different types of transactions involved in it.
The only feature that differentiates it from other similar methods is the wider range of strike prices, as a result of which it is also sometimes referred to as wide iron condor spread.
The iron albatross spread comprises major transactions or legs, as they are more accurately described, of buying and writing call options and purchasing and writing of put options. It is a strategy that requires a high trading level, and is therefore suitable for experienced investors.
Despite all the complexity involved, it remains popular among options traders due to its potential in increasing profitability and reducing the risks of loss.
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Circumstances that are suitable for the use of iron albatross spread
The iron albatross spread is a neutral options trading and therefore, it can be used by investors who expect only a slight movement in the price of the underlying asset in either direction.
It can generate a wide profit even in the neutral market, with low asset volatility, which makes it the most useful strategy for experienced investors.
The procedure involved in the implementation of the strategy
The iron albatross spread involves four major legs which are a combination of purchasing and writing both call and put options, at every level.
In each of the legs, the traders are required to use options that are further out of the money, when compared to the options used in iron condor spread.
The 4 significant legs of the strategy include –
- Purchasing the call options that are far out of the money.
- Writing an out of the money call option.
- Buying largely out of the money put options.
- Selling an out of the money put options.
The trader has to be careful to keep the strike price of selling call options higher than buying a call option and similarly, has to keep the put options’ selling strike lower compared to the buying of a put option.
This is important because it is the difference between the two short options (2 and 4 legs) that describes the range of profitability.
Moreover, the number of options bought and sold, and the expiry date of the options in all these legs have to be the same.
Find out other Neutral Option Trading Strategy here
|Calendar Straddle||Covered Put||Short Straddle|
|Covered Call||Short Strangle||Call Ratio Spread|
|Butterfly Spread||Albatross Spread||Iron Condor Spread|
Iron Albatross Spread Example
The iron albatross spread can provide the maximum profit potential if the difference in strike prices is small, but the drawback of this case is that the chances of bringing in this maximum profit are much less.
On the other hand, there are higher chances of producing the maximum profit if the difference is wider, however, the maximum profit potential, in this case, would be slightly lower.
The following general example can demonstrate the iron albatross spread better. The example explained is an outline and does not include any real data or commissions involved in the trade.
- Assume a company to be trading at 100 INR and the investor is expecting a neutral trend in the market.
- Leg 1- The trader purchases an out of the money call contract with 100 options at a rate of 100 INR. The strike price in this case is 106 INR.
- Leg 2- The trader sells an out of the money contract at the credit of 100 INR, at 1 INR each for 100 options. The strike price, in this case, is 104 INR.
- Leg 3- The trader buys an out of the money put option with 100 options, similar to leg 1. The strike price here is 96 INR.
- Leg 4- the trader writes an out of the money put option, similar to leg 2, with the strike price of 98 INR.
- The total credit is 200 INR, from the transactions of leg 2 and 4 and the total cost for the trader is 100 INR, from the transactions of leg 1 and 3. The total credit generated using this strategy would be 100 INR.
Profits and risks of iron albatross spread
The maximum profit that can be obtained from the iron albatross spread is the net credit created by the trading of options.
To generate the maximum potential, profit the price of the underlying asset has to remain within the strike prices set by the writing of call and put options (legs 2 and 4).
In the example mentioned above, to gain the profit the stock price must remain within the range of INR 98 and INR 104.
The traders can also get a lower profit if the stock price remains within the profitable range of the upper and lower break-even points in the spread.
However, it is to be noted that there are risks of losses if the price goes out. The upper break-even point is the sum of the strike price of the call option and the net credit, while the lower break-even point is the difference between the strike price of the put option and the net credit.
The profits and losses of iron albatross spread can be summarized as,
Maximum profit– the maximum profit potential can be generated in the following ways,
- Net credit.
- Stock price < strike price in leg 2
- Stock price > strike price in leg 4
Profit- traders can get a fair profit if the stock price remains within the two break-even points.
Risk of loss– the possible chances of loss are,
- The trader may have losses if the stock price moves beyond the break-even points.
- If the stock price is equal or greater than the strike price in leg 1.
- If the stock price is equal or less than the strike price in leg 3.
Find out more relevant Neutral Option Trading Strategy below
|Condor Spread||Calendar Put Spread||Calendar Strangle|
|Calendar Call Spread||Short Gut||Covered Call Collar|
|Put Ratio Spread||Iron Butterfly Spread|
What if the neutral trend of stock changes unexpectedly?
The iron albatross spread is exclusively a neutral trading strategy and the traders can get losses if the stock shows a dramatic movement in either direction.
Experienced traders can modify this neutral strategy to a bull put spread or bear call spread if the stock rises or falls unexpectedly before the expiration.
Benefits and drawbacks of the Iron Albatross Spread
here are the advantages & disadvantages of this strategy –
The common benefits of iron albatross spread include –
- It has great potential to create profits in neutral market conditions.
- It helps the traders in calculating the maximum profits that can be obtained from this strategy.
- The strategy generates a credit spread, and it is much more profitable than debit spreads.
- Even though it is complex, it is flexible enough to make changes in strategy to convert it into bull call spread or bear put spread.
Some of the drawbacks of the strategy are,
- It is a complex strategy, not suitable for beginners.
- Also, it involves larger commissions due to the requirement of 4 transactions when compared to other trading strategies.
- It requires a high level of trading skills.
Iron Albatross Spread: Conclusion
The iron albatross spread is a great choice for experienced investors to create profits out of the stocks that show no significant movement.
Neutral trading is often considered risky and less profitable, but advanced strategies like the iron albatross spread have the potential to ensure a maximum profit in such conditions as well.
Moreover, it is a method that requires a high trading level. It is a complex process incorporating 4 necessary transactions of buying and selling call and put options.
The strategy largely brings profit from the credit spread that is created by the transactions. An additional specialty of this particular strategy is that it needs further out of the money options for trading.
In this method, the chances of creating profits are much higher, even though the maximum profit that can be obtained is limited and can be calculated at an early stage itself.
It has an equal number of benefits and drawbacks that have to be studied before trying out the strategy.
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