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Summary

Computes the net expected value of an iron condor (short put spread + short call spread) held to the plan exit, over five expiry regions, with an explicit four-leg cost model and the mandatory baseline comparators. Blessed code per the EV contract.

Computation

EV = Σ over regions {below long put, put body, OTM band, call body, above long call} P(regionᵢ)·payoffᵢ − commissions − slippage.

Pseudo-formula:

net_credit = (short_put_px − long_put_px) + (short_call_px − long_call_px)
max_loss   = max(wing_put, wing_call) − net_credit   # the WIDER wing: at expiry at most one side is ITM
P(band)    = P(short_put < S_T < short_call)  real-world (GARCH/HAR, fat tails)
ev_gross   = P(band)·net_credit − P(break)·E[partial loss]
costs      = 4·fee_per_contract·n  +  slippage_pct·net_credit·100·n
ev_net     = ev_gross − costs / (100·n)
baseline_vrp   = iv − rv_window        # variance risk premium, annualized vols
baseline_ev_rv = SAME structure's EV under the RV distribution (rv_window)
edge_vs_rv     = ev_net − baseline_ev_rv

Parameters

Name Type Req Notes
spot number yes underlying price at evaluation
iv number yes blended IV at evaluation
dte integer yes days to expiration (TOMIC-style ~60)
short_put / long_put number yes lower short strike and wing
short_call / long_call number yes upper short strike and wing
skew_put / skew_call number no per-side IVs when the feed provides them
contracts integer no size, default 1
fee_per_contract number no per leg per contract; four legs
slippage_pct number no fraction of net credit; wide structures slip more
rv_window number yes annualized real-world realized vol estimate (fail-closed)
garch_forecast number yes annualized GARCH-class real-world vol forecast (fail-closed)

What It Reports

ev_net, ev_gross, net credit, max loss, prob_otm_band, total_costs, baseline_vrp, baseline_ev_rv, edge_vs_rv, and a receipt for the run-ev skill. Condor EV is dominated by the tail-region probability model — see limitations.

Limitations

The physical distribution is lognormal under the GARCH forecast (garch_forecast) with equity-premium drift (r + 4% equity risk premium; dividends do not enter the index-price drift for total-return-ignored index options); region probabilities are exact lognormal CDF differences. A pure lognormal still understates both tails relative to the empirical density — fat-tailed, skew-aware density is TODO(data-feed). Early assignment on short ITM puts and exit management (TOMIC closes at 50–60% of credit) are not modeled. Context: condor setup, volatility selling.

References

  • Chen & Sebastian, The Option Trader's Hedge Fund (Wiley, 2012) — iron condor playbook.
  • Natenberg, Option Volatility and Pricing (McGraw-Hill, 1994) — vol selling and skew.
  • Cont, R. (2001). Empirical properties of asset returns: stylized facts and statistical issues. Quantitative Finance, 1(2), 223–236.
  • py_vollib documentation — https://py_vollib.readthedocs.io/

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