To The Moon

Hello！

Welcome to Tiger Academy - 「Options Advanced Strategy」episode 3.

As we all know, regardless of the type of options strategy employed, achieving a perfect balance between high returns, substantial leverage, and a high win rate is a challenging task.

For instance, aiming for high profits and large leverage inevitably comes with the trade-off of a lower win rate, as seen in strategies dominated by buying positions. Conversely, strategies dominated by selling positions tend to exhibit a high win rate but with limited profits and unlimited potential losses.

Of course, after studying numerous combination strategies, we've come to understand that a relative balance between win rate, return rate, and risk-reward ratio can be achieved through the combination of option strategies.

The strategy we are introducing today, the Iron Eagle strategy, excels at harmonizing these three aspects seamlessly.

What kind of strategy is this? First and foremost, the Iron Eagle strategy can achieve a remarkably high win rate. Secondly, unlike the straddle strategy, its return rate doesn't necessarily peak at a specific price level but can realize maximum gains within a certain range.

Finally, it can achieve a risk-reward ratio of several tens of times while limiting losses to a slight extent!

Sounds impressive, right? Next, let's take a look at how to execute this strategy.

1.What is the Iron Eagle Strategy?

The operation of the Iron Eagle strategy can be summarized as follows:

1. Buy put options (P1) with a lower strike price.

1. Sell put options (P2) with a slightly lower strike price.

1. Sell call options (C3) with a slightly higher strike price.

2. Buy call options (C4) with a higher strike price.

In other words, P1 < P2 < C3 < C4, with the aim of ensuring that the net premium income from these two sets of options is positive.

For example, if the current price of Tesla stock is around $239, you might choose to buy put options with a strike price of $235 while simultaneously selling put options with a strike price of $237.5. This combination generates a net premium income of $1.25 ($6.05 - $4.8). Following this, you could sell call options with a strike price of $240 and buy call options with a strike price of $242.5, resulting in a net premium income of $1.18 ($0.89 - $0.1). All four options have the same expiration date, December 22nd of the current year. In the end, the entire strategy combination generates a net premium income of $2.43 ($1.25 + $1.18).

Therefore, a very apparent advantage of the Iron Eagle strategy is that it generates a net premium income from the initiation of the position, a concept we refer to as "rental income at the opening." Now, let's explore the subsequent risks and returns of the Iron Eagle strategy.

2. Risks and Returns of the Iron Eagle Strategy

Subsequent price movements will impact the overall profitability of the strategy, roughly falling into three price movement intervals:

1. If the stock price falls within the range of $237.5 to $240, none of the four options will be exercised, and the strategy will realize the maximum profit of $2.43.

2. If the stock price is outside the range of $242.5 and $235, the strategy will incur a maximum loss of $0.07 ($2.5 - $2.43).

3. When the stock price is equal to $242.43 or $235.07, the strategy breaks even.

In summary, we can directly plot the profit and loss diagram for this strategy.

The advantage of this strategy is quite apparent. With a maximum potential loss of $0.07, the strategy can achieve a maximum profit of $2.43, roughly a 34-fold risk-reward ratio. Furthermore, through the judicious selection of strike prices, the strategy can expand the profit range to the maximum, or even achieve a situation of complete loss avoidance.

Don't believe it? Let's continue with the calculation.

Suppose we slightly adjust the strike prices; can we achieve a situation of zero loss?

3. How to Choose the Strike Prices for the Iron Eagle Strategy?

We refer to the price difference between the strike prices of two options as the "step size." In theory, as long as the net premium income of the Iron Eagle strategy is greater than the step size, the strategy can achieve complete loss avoidance. Building on the previous example, if we swap the strike prices of the two call options—buying a put option with a strike price of $235 and selling a put option with a strike price of $237.5—the net premium income for this option combination is $1.25 ($6.05 - $4.8).

Following this, if we then sell a call option with a strike price of $237.5 and buy a call option with a strike price of $240, the net premium income for this option combination is $1.32 ($8.65 - $7.33).

In the end, the net premium income for this strategy is $2.57, exceeding the step size of $2.5.

The profit and loss scenarios are as follows:

1. When the stock price is equal to $237.5, none of the four options will be exercised or assigned, and the strategy realizes the maximum profit of $2.57.

2. When the stock price is outside the range of $235 and $240, the strategy ultimately achieves a profit of $0.07 ($2.57 - $2.5).

The profit and loss diagram is as follows:

Many of you may find it incredible—Does this mean it's a guaranteed profit without risk? While theoretically true, there are two points to consider:

1. Transaction Fees Not Considered: If the strategy achieves a minimal profit of $0.07, the possibility of incurring losses after deducting transaction fees remains uncertain.

2. Uncommon Scenario: This situation is not very common. We need to actively seek assets with an implied volatility (IV) spike (only in such cases can the net premium income exceed the step size). For example, in the previous case, Option IV was essentially in a spike state.

Of course, the Iron Eagle strategy outlined above is based on the expectation of stock price volatility. If the underlying asset's trend breaks the expected pattern, then the opposite action can be taken by everyone.

If you find this article helpful, please like and share it. You will earn Tiger Coins! See you in the next episode!~