Reverse Iron Condor strategy is setup when the investor buys an Out of the Money call and sells an even higher strike out of the money call, buys an out of the money put and sells an even lower strike out of the money put, all of the same underlying security and same expiry.
When to use this strategy?
This strategy is used when the investor is non directional but expects the price of the underlying security to either rise sharply or fall sharply by expiry.
How to build this strategy?
This strategy has four legs:
Leg 1 – Buy 1 OTM Call
Leg 2 – Sell 1 OTM Call with even higher strike price
Leg 3 – Buy 1 OTM Put
Leg 4 – Sell 1 OTM Put with even lower strike price
Credit Spread/Debit Spread
This is a Debit Spread strategy.
This strategy has limited profit potential.
When is this strategy profitable?
This strategy makes maximum profit when the price of the underlying security at expiry is either higher than the strike price of the call option sold, or lesser than the strike price of the put option sold.
The investor faces limited risk in this strategy.
When is this strategy unprofitable?
The investor faces a loss when the price of the underlying security at expiry is between the strike prices of the call and put options purchased.