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Over the last few weeks, I have pointed out on several occasions that Iron Condors look like a nice trade. For those that haven’t figured out why, take a quick look at this Chart of SPX price movement and implied volatility:
Notice the following:
1. SPX has actually been range bound over the last 2 months, especially given the implied volatility in the options. REALIZED volatility is reading high, but that is only as a measure of the change in price from close to close. It does not take into account which direction the movement heads. Also, it does not take into account a NET realized volatility over a given period of time (one of the reasons why HV can be hard to use).
2. IV is range bound: there is a reason VIX IV has been falling, and the VIX has been stuck between 32 and 40. For now, selling 40 VIX and buying back 32 seems to be a decent way to trade
3. IV is too high: yes, relative to current measures of realized volatility, it might seem low, but really it’s a little overpriced. If we consider where the market has gone, how much juice is in options and how wide a trade can be set up, there is a ton of lee-way
Now before you go crazy selling a ton of options, remember, the market is acting like it wants to TANK. We will break out either up or down at some point. I am just not sure in what direction and when. Best thing traders can do is to buy units or VIX options, or heck, VXX options right now with futures in backwardation. The potential to break out is there and should be managed. That said, the IC seems like the best short premium play out there.
Finally: we are looking for smart, high net worth traders to join our L3 Professional Trader's group. Interested in talking to pro's throughout the day, looking to assist in researching new ways to trade, looking for exclusive discounts on everything from analytics to brokerage, and get the best one on one education a trader with portfolio margin can get? Call us (888) Trade-01 or email me mark@optionpit.com to apply for admission.
Graphs from LiveVolPro
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