Reverse Iron Albatross Spread: A Complex Volatile Trading Strategy

Options strategy traders have the choice to exercise their funds in a variety of strategies. Reverse iron albatross spread is one of these.


About Reverse Iron Albatross Spread

Analogous to most options strategies, the reverse iron albatross spread also bets upon the volatility of the market and price movements of the underlying security.

However, the strategy happens to be one of the most complicated strategies among its counterparts. This is why it is not optimum for someone who is just beginning out in the options segment of the market.

Yet, the structure of the strategy remains similar to most of the other simple options strategies.

The investor is likely to place a bet on the movement of the market indices, and expect to benefit from the resulting volatility. The key elements of this strategy include entering four separate transactions.

Since this strategy belongs to a family of neutral but complex options, it obtains its name cleverly to reflect an idea of the same. It comes from a bird, with an increasing span of wingspan as it continues to soar high.

Among the most neutral complex options strategies, the reverse iron albatross spread is the most widely profitable one.


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What is the right time to use the Reverse Iron Albatross Spread?

To make use of the strategy, the investor must choose a range for which they would like to keep the options contracts.

Subsequently, if they expect the price of an underlying security to hover between a predetermined range of prices, which is fairly wide, over the said range of options contracts, this strategy can be designed and implemented.

Using the strategy is simple but it creates a credit spread, which is in contrast to most other simple strategies. Here are the four different options trades which will require establishment for the strategy to work:

  • Buy an out of the money call option
  • Sell an out of the money call option
  • Buy an out of the money put option
  • Sell an out of the money put option

A seasoned investor will realize that the spread actually involves using a bear call spread and a bull call spread.

Since this theory is really technical, it is not advisable for new investors to bet their money on this strategy.

Only those investors who have a solid history of trading in the options market must dare to venture this strategy.

In practice, the reverse iron albatross spread is really similar to the reverse iron condor spread. Traders commonly use the former but in practice, they are more or less quite similar to one another.

It is worthy to note that both the strategies make use of a wide range between strike prices to come into effect.

There is some difference in consensus between experts about the applicability of these strategies though.


Potential to earn a profit or incur losses with a Reverse Iron Albatross Spread

A bear call spread of out of the money option will benefit using this strategy. This will happen when the underlying stock used for the strategy either remains stagnant, rises slightly or drops slightly from its current price levels.

On the other hand, an out of the money bull put spread will also benefit from the underlying security. It will be if it remains stagnant, drops slightly or rises slightly.

Together both of these strategies are made to combine. Then the investor will find themselves in a profitable position in some situations. This is most likely when the price of the underlying security remains stagnant.

If there is a rise or fall in the component spread of the strategy, the resulting levels of profit for the investor might decrease.


Find out other Volatile Option Trading Strategy here

Short Condor SpreadLong StraddleShort Calendar Put Spread
Long StrangleReverse Iron Butterfly SpreadShort Butterfly Spread
Long GutReverse Iron Condor Spread

How to design a Reverse Iron Albatross Options Strategy?

The investor will have to start by deciding the strike prices at which they want to purchase the options.

To buy an out of the money call and out of the money put option, they will first decide the range within which the security might trade in. This is also known as a profitable range.

The associated risk with these options is lower if the strike price is farther away from the money. This is because the underlying security will then need to move more in order to move out of the profitable range.

If the investor exits the profitable range, the maximum loss will manifest and increase as it happens.

When trading in a strategy such as this one, the investor must prepare for the eventuality of this situation.

The investor must study the difference between the strike prices of the short call and short put options.

This is because it will establish a range of positions which can possibly result in maximum profit for the investor.

If the difference of such strike prices is wide, the potential to make maximum profit reduces.

However, at the same time, there is an increase in the probability that the underlying security will actually remain within that range by the time of expiry of the options.

Vice versa, if the range between the strike prices is small, there is a maximum potential to make huge profits.

But, the probability that the price of the underlying security will remain within the range reduces. This is yet another risk that the investor of the options strategy must be willing to undertake.


Find out more relevant Volatile Option Trading Strategy below

Short Calendar Call SpreadStrip StraddleStrap Strangle
Short Albatross SpreadStrap StraddleStrip Strangle

Return to the investor

At the expiry of the options, the investor can make a maximum profit is the price of the underlying security remains within the range of the strike prices. It is easy to determine this range by the short put and call options.

The investor will realize the maximum loss under this strategy considering the net credit and the difference in the strike prices between the short and long strikes.

There is a limit to the upside of maximum profit from the strategy due to the net credit gain.

And there is a limit to the maximum loss under this strategy which is calculated using net credit and difference in strike prices.


Should an investor opt for Reverse Iron Albatross Strategy?

This is easy to answer by exploring the benefits and low downs of the advanced strategy. On one hand, the investor stands to make gains from a stock that is staying stagnant.

As compared to a debit spread, there is a higher probability of gaining a profit due to the element of the credit spread.

It is possible for the investor to predict profits and losses with this strategy. Thus, this is a very versatile strategy for experienced traders.

However, the strategy is not without disadvantages. Due to the increase in the number of trades, the overall commission in this strategy is more.

Moreover, this is not a strategy that an investor can explore if his trading levels are low.


Reverse Iron Albatross Strategy – Conclusion

As can be seen from the explanation stated above, the Reverse Iron Albatross Strategy is suited for skilled investors.

They are traders who are well versed with the operation of the market. This is not a strategy for first-timers, and certainly not for those who do not have experience in trading in the options market.

Thus, it should be chosen at a time, when the trader expects the prices of the security to remain stagnant. In this way, the level of expected profit is also determinable by them.


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Similar Topics on Options Trading

Introduction to Option Trading
Options Trading for Beginners
How to Start Options Trading?
Choose the Right Options Strategy
Become an Advanced Option Trader
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Nifty Option Chain
Open Interest Stock Option
Open Interest Index Option
Most Active Index Option
Most Active Stock Option
Put Call Ratio
Risk Reversal Option Strategy

 

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