Long Strangle
Buy an out of the money call and put to profit from a large move either way, at a lower cost than a straddle but with wider breakevens.
Learn strategyNeutral4 LegsDefined risk
Reverse Iron Condor
A defined risk long volatility trade. Buy an inner call and put spread to profit from a big move either way, with both risk and reward capped.
By Team Agora Circle
Written by the Agora Circle editorial team. Educational content, explained for the Indian market. Not investment advice.
- Market outlook
- Direction neutral, volatility bullish. You expect a move but want capped risk.
- Setup
- Buy an inner call spread and an inner put spread; sell the outer wings to fund them.
- Max profit
- Capped. The width of one spread minus the net debit, reached beyond either wing.
- Max loss
- Limited to the net debit paid, lost if the price stays between the inner strikes.
- Breakeven
- Inner call strike plus net debit on the upside; inner put strike minus net debit below.
- Implied volatility
- Long vega overall. Rising implied volatility helps, an IV crush hurts.
- Time decay
- Time decay works against the position while the price sits in the middle.
Strategy Overview
A reverse iron condor is a long strangle with its cost and its reward both capped. You buy an inner call and an inner put, which give the position its long volatility character, and you sell a further out call and put as wings, which reduce the cost in exchange for a ceiling on profit. The result is a defined risk way to bet on a big move without picking a direction.
It is the mirror image of the ordinary iron condor. Where the iron condor collects premium and profits from a quiet market, the reverse iron condor pays a net debit and profits from an active one. Both risk and reward are fixed on day one, which makes it easy to size and easy to hold through an event.
The trade off compared with a plain long strangle is the capped upside. You give up the open ended profit of the strangle in return for a lower cost and a smaller maximum loss. It suits a view that the market will move to a specific extent, rather than explode without limit.
How to Set It Up
Four legs at four strikes: a long inner strangle financed by a short outer strangle.
- 1Buy an out of the money put and an out of the money call just outside the current price. These are the long legs that carry the move.
- 2Sell a further out put and a further out call as the wings. The premium collected lowers the net debit.
- 3The net debit you pay is your maximum loss, and the spread width minus that debit is your maximum profit.
Payoff Diagram and Example
Max Profit
Capped. The width of one spread minus the net debit, reached beyond either wing.
Max Loss
Limited to the net debit paid, lost if the price stays between the inner strikes.
Breakeven
Inner call strike plus net debit on the upside; inner put strike minus net debit below.
Suppose NIFTY is at 25,000 and you expect a move but want defined risk. You buy the 24,800 put for 110 and the 25,200 call for 120, then sell the 24,600 put for 70 and the 25,400 call for 75. The net debit is 110 plus 120 minus 70 minus 75, or 85 points. With a lot size of 75, the maximum loss is 85 x 75 = Rs 6,375.
Each spread is 200 points wide, so the maximum profit is 200 minus 85, or 115 points, about Rs 8,625. That maximum is reached once the index closes at or beyond either wing, 25,400 on the upside or 24,600 on the downside.
The breakevens are 25,285 on the upside and 24,715 on the downside. Between 24,800 and 25,200 at expiry all four options expire worthless and the full 85 point debit is lost. The position needs the index to travel past a breakeven to profit.
Entering and Exiting
Enter all four legs together as a single package so the net debit is locked. Legging in exposes you to price moves between fills.
Exit by closing the whole structure once a move has pushed it toward maximum profit, or before expiry if the move fails and you want to salvage part of the debit.
Because both risk and reward are capped, the position is comfortable to hold to expiry, but the best exits usually come when a sharp move early in the life of the trade has already delivered most of the available profit.
Time Decay (Theta)
Time decay works against the position while the index sits between the inner strikes, because the long inner options lose value faster than the short wings there. A quiet market slowly erodes the debit.
Once the index moves toward a wing, the decay dynamics shift in your favour on that side. The key point is that, like any long volatility trade, it wants the move to come sooner rather than later.
Implied Volatility (Vega)
The net position is long vega, so a rise in implied volatility after entry increases its value even before the price moves. This makes it attractive to put on when volatility is cheap.
The usual event caution applies. Buying a reverse iron condor when IV is already elevated ahead of a catalyst exposes it to a volatility crush afterward, which can offset the benefit of a real move.
Common Adjustments
If the index moves strongly one way, you can close the untested side to recover some premium and let the profitable spread run to its cap.
If the move stalls near a breakeven, closing early to preserve part of the debit is usually better than hoping for a late push, since decay is working against you in the middle.
The width of the wings can be chosen at entry to tune the cost against the reward. Narrower wings cost less but cap profit sooner; wider wings cost more but pay more on a large move.
Synthetic Equivalent
A reverse iron condor is equivalent to buying a long strangle at the inner strikes and simultaneously selling a wider short strangle at the outer strikes. The short strangle is what caps both the cost and the reward.
It can also be seen as a long inner call vertical plus a long inner put vertical sharing the same expiry, which is how many platforms let you build and manage it as a single order.
Pros and Cons
Pros
- Defined risk and defined reward, both known before entry.
- Profits from a move in either direction without picking one.
- Cheaper than an equivalent long strangle because the wings fund it.
- Long vega, so it gains if implied volatility rises.
- Easy to size and comfortable to hold through an event.
Cons
- Profit is capped, unlike an open ended long strangle.
- A quiet market between the inner strikes loses the full debit.
- Four legs mean more brokerage and more bid ask spread to cross.
- Vulnerable to an IV crush if entered when volatility is already high.
Frequently Asked Questions
How is a reverse iron condor different from an iron condor?
They are opposites. An iron condor sells the inner strikes and buys the wings, collecting a credit and profiting from a quiet market. A reverse iron condor buys the inner strikes and sells the wings, paying a debit and profiting from a big move.
Why choose this over a long strangle?
For lower cost and a smaller maximum loss. Selling the wings reduces the debit compared with a plain strangle, at the price of capping the profit. It suits a view that the market will move a defined amount rather than without limit.
When does a reverse iron condor lose money?
The net debit paid, which is lost only if the index finishes between the inner strikes at expiry. In the example that is 85 points, or Rs 6,375 on one lot.
Where is the maximum profit reached?
At or beyond either wing. In the example the full 115 point profit is reached once the index closes at or above 25,400 or at or below 24,600, and it cannot grow further beyond those points.
Is this a good event strategy?
It can be, when you expect a move of a roughly known size and want capped risk. Just be mindful of implied volatility: entering when IV is already high risks a crush that eats into the payoff of a genuine move.
Related Strategies
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Learn strategyReverse Iron Butterfly
A defined risk long volatility trade. Buy an at the money straddle and sell wings to fund it, profiting from a sharp move either way.
Learn strategyLong Straddle
Buy a call and a put at the same strike to profit from a large move in either direction. Risk is capped at the combined premium.
Learn strategyThis page is for education only. It is not investment advice, and nothing here is a recommendation to buy or sell any instrument. Options involve substantial risk, and option sellers can lose far more than the premium they receive. Please do your own research or consult a SEBI registered investment adviser before trading. Read our full disclaimer.