A short strangle is comprised of selling an out of the money call and an out of the money put. A similar strategy is a short iron condor which buys further out of the money options on both sides to define the risk.
Since short strangles can be an expensive trade, many accounts may elect to trade iron condors. But how similar are the price movements between strangles and iron condors?The Study:
- 2005 – Present
- 45 Days to Expiration
- Short 20 Delta Option
- Compared Correlations in PL for Strangles and Varying Width Iron Condors
- 1, 2, 5, 10 Wide
Although the PL of narrow iron condors has a strong positive correlation to that of short strangles with the same delta, we see that the correlations in performance increase as we widen the wings. However, it’s important to note that correlation is only a measure of direction, not magnitude. When we look at the PL performance of narrow versus wide iron condors, we see that wider iron condors move much more closely to strangles than their narrow counterparts.