Buy or Sell Iron Condor/Butterfly

Script name: Iron Condor / butterfly buy or sell indicator

Iron condor expiration
buying Iron condor indicator

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Input parameters explanation
Iron condor indicator input

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1.      Choose Buying or Selling the strategy.

2.      The debit paid or credit received for the strategy (1 unit).

a.       Minimum value: zero; only positive numbers.

b.      If debit for 1 strategy unit is $1 insert 1.

c.       If credit for 1 strategy unit is $0.5 insert 0.5.

d.      1 unit explained – enter the net debit/credit of 1 unit of strategy only.

3.      The stock price when bought/sold the options.

a.       Minimum value: zero; only positive numbers.

4.      Upper Strike price TOP of the strategy.

a.       Minimum value: zero; only positive numbers.

5.      Lower Strike price TOP of the strategy.

a.       Minimum value: zero; only positive numbers.

6.      Upper Strike price BOTTOM of the strategy.

a.       Minimum value: zero; only positive numbers.

7.      Lower Strike price BOTTOM of the strategy.

a.       Minimum value: zero; only positive numbers.

8.      Interest rate: annualized continuously compounded risk-free rate of return over the life of the options.

a.       Minimum value: zero; only positive numbers.

b.      U.S. Department of the treasury – find it here

9.      Time to expiration of the options, specify the number of days.

a.       Minimum value: 1; only positive numbers.

b.      Only integer numbers. No half days allowed.

c.       The number of days to expiration has to be matched with the date entered below!  The date and the number of days should not be changed by the user, as time passes.

10.  Annualized asset price volatility, specific as a positive decimal number. IV 10% => input 0.1

a.       Minimum value: zero; only positive numbers.

b.      Find it in the “options chain”, in your brokerage platform.

11.  A calendar day of the month that the option bought/sold.

a.       Input 1 to 31 depending on the calendar date.

12.  Calendar month the option bought/sold.

a.       Input 1 to 12 depending on the calendar date.

13.  Calendar year the option bought/sold.

a.       Minimum value: 1970.

b.      The year format is 4 digits number.

14.  Profit/loss line defined by the user.

a.       Minimum value: -0.95 ; Maximum value: 0.95

b.      Section (c) and (d) are for inputs of positive numbers and (e) and (f) are for inputs of negative numbers.

c.       Please note that the strategy doesn’t have to be symmetric. This means that the maximum profit to the downside could be different from the maximum profit to the upside (for buying the strategy). The indicator plot the upper line and lower line. The upper line is a percent of the maximum profit to the upside and the lower line is the percent of the maximum profit to the downside.

d.      For selling the strategy, the maximum loss to the downside could be different from the maximum loss to the upside. The indicator plot the upper line and lower line. The upper line is a percent of the maximum loss to the upside and the lower line is the percent of the maximum loss to the downside.

e.       For buying the strategy, both of the lines represent a percentage of maximum loss.

For selling the strategy, both of the lines represent a percentage of maximum profit.

Indicator chart explanation

Buying the strategy

Iron condor buying

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  1. Break-even lines – these lines mean that if the price got there, the unrealized profit is zero.

  2. Percent lines – these lines mean that if the price got there, it shows the percentage of max profit or loss depending on user inputs.

  3. 95% of the max profit – these lines mean that if the price got there, 95% of max profit reached.

  4. The red fill – this area means that if the price got there, the strategy is losing.

Example:

The strategy price bought: $2.34 (remember the multiplier for stocks is 100, the debit is -$234).

The price of the stock: $85.7

The upper strike price (top): $100

The lower strike price (top): $95

The upper strike price (bottom): $75

The lower strike price (bottom): $70

Risk-free rate: 0%

Days to expire: 46

Implied Volatility: 56.6%

Date: 31/08/2020

If at expiration the price will finish between $72.65 - $97.32, the strategy will lose (red area).

If at expiration the price will finish at exactly $97.32 the position will break even (orange line).

If at expiration the price will finish at exactly $72.65 the position will break even (orange line).

If at expiration the price will finish at exactly $99.87 the position will profit $222 (blue line).

If at expiration the price will finish at exactly $70.12 the position will profit $222 (blue line).

Different uses for the indicator

Volatility changes: the indicator can be used to give an estimation about the profit/loss lines as a function of volatility changes.

Volatility increase Iron condor

+20% Volatility increase

Volatility decrease Iron condor

-20% Volatility decrease

Tip: you could add the indicator twice, so you will have a reference point as the charts above.

Lower timeframes: the indicator can be used for intra-day plotting while using a lower timeframe than Daily. This is automatic.

Iron condor lower timeframe

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Changing the percentage of maximum profit or loss

In the picture below, we see the strategy iron condor sell, meaning if the position is in the green area you make a profit.

% of profit/loss = -0.5 -> When we selling this strategy for credit, we want the strategy to lose value. The inside purple lines are where 50% of the total credit is received (the options combination of the strategy lost 50% of their total value).

% of profit/loss = 0.5 -> The outside purple lines represent 50% of the potential max loss of the relevant side (upside or downside). The maximum loss to the upside can be different from the maximum loss to the downside. That depends on how the user builds his strategy.

Iron condor selling indicator profit

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Estimate days until you can realize a profit

Notice in the example above, to realize 50% of the credit received, you need to wait 30 days out of 46.

Selling the strategy

Iron condor selling

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  1. Break-even lines – these lines mean that if the price got there, the unrealized profit is zero.

  2. Percent lines – these lines mean that if the price got there, it shows the percentage of max profit or loss depending on user inputs.

  3. 95% of the max loss – these lines mean that if the price got there, 95% of max loss reached.

  4. The green fill – this area means that if the price got there, the strategy is winning.

Example:

The strategy price bought: $2.34 (remember the multiplier for stocks is 100, the credit is $234).

The price of the stock: $85.7

The upper strike price (top): $100

The lower strike price (top): $95

The upper strike price (bottom): $75

The lower strike price (bottom): $70

Risk-free rate: 0%

Days to expire: 46

Implied Volatility: 56.6%

Date: 31/08/2020

If at expiration the price will finish between $72.65 - $97.32, the strategy will win (green area).

If at expiration the price will finish at exactly $97.32 the position will break even (orange line).

If at expiration the price will finish at exactly $72.65 the position will break even (orange line).

If at expiration the price will finish at exactly $99.87 the position will lose $222 (blue line).

If at expiration the price will finish at exactly $70.12 the position will lose $222 (blue line).

For Futures users

Please note that the futures indicator and the stocks indicator are not the same.

The algorithm is made of different equations for futures. Also using the stock indicator on futures will not work properly.

The stock indicator on Futures will not work.

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The future indicator on Future will work

Iron condor future indicator

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Example on gold futures:

The algorithm is made of different equations for futures.

Even if it looks to be working normally, the result will not be accurate.

In the picture below, the strong lines are the future indicator VS the stock indicator (weak lines).

gold future Iron condor

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Notes

TradingView considerations

 

The indicator is subject to the platform constraints, meaning updates in the platform could change the intended results of the indicator. See the following examples:

Holiday Updates: the indicator is updated 2 years ahead, TradingView updates only the current year. Using long term strategies, especially at the end of the calendar year, could result in a discrepancy at the expiration date that is displayed.

Some indicators have a “fill” option available. When using different timeframes, the fill could be out of place.

We recommend the users to save the indicator settings. This is because once in a while there will be updates in the indicators. Once the update is loaded to Tradingview, the settings will convert to the default settings. We will announce updates in advance.

Algorithm considerations

 

IPO stocks – the life of the option needs to be less than the amount of time the stock is in the market. If it is more, only partial calculations will be displayed. For example, the stock is trading 1 month in the market (ever). Calculating for an option with a life of 2 months will not display the entire calculations for the whole life of the option.

“Data Reset” – loading many bars can result in a slower running time of the indicator. To avoid this, zoom in the chart so you will see only a few bars, then change to different stock, and then change again to the original (intended) stock.

Lower timeframes – the indicator is always doing the calculations, even if it is not being displayed. This can be confirmed when the tag “Calculation complete” is seen. If the tag is displayed but the indicator is not, this can be fixed by reloading more historical bars.

Higher timeframes – the highest timeframe that the indicator can be used, is Daily.

Futures/Stocks – the stock indicators cannot be used for futures and vice versa. Using the wrong indicators on the wrong instrument will result in wrong calculations and errors.

Calculation accuracy – the calculation error is less than 0.01%.

Theoretical model accuracy – the indicator is using the Black-Scholes model. Due to price spreads and/or supply and demand real-world market dynamics, there will be a variation from the theoretical model and the real-world market prices. The model is most accurate when the strike price is close to the instrument price (at the money).

Time accuracy – in the futures markets the indicator might show an extra day after expiration due to holidays. The final result doesn’t change between the last day and the extra day.

Commissions – the algorithm does not take into account any commissions you might have.

Dividends and discounts – the user should be aware of upcoming dividends or discounts.

Personal note

 

If this indicator is truly helpful and gives you viable information please give us credit when using it.

If you have any questions or requests please contact us. We will be happy to help.