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How To Earn Stable Iron Condor Profits When the VIX Is Low

Iron condor trading is the best way to earn a consistent income in the options market without needing to pick stocks or time the market. You're able to exploit an inefficiency in the market called "risk premium" as investors are always scared about what's just around the corner.

But what if that premium gets too low? Is it still possible to build your portfolio when volatility gets too low?

Let's take a look at how it's not only more profitable... but it's also a much easier trade to manage.

Measuring Volatility To Avoid Costly Losses

The most widely followed indicator is the VIX.


This indicator measures the demand for protection in the S&P 500 options market.

Consider it like an insurance premium. If you're a middle-aged woman with 2 kids and a minivan, then you won't have a high car insurance premium. But if you're a 20 year old trust fund baby with a bright red Ferrari in Miami... then you're going to pay up.

The way we earn significant returns with iron condor trading is because most of the time, the actual risk in the market is less than what the options market was pricing in.

In other words, the implied volatility was lower than the actual volatility.

But what if the VIX gets really low?

The question then becomes... is the juice worth the squeeze?


Market Movement in a Low VIX

There are two charts I'd like to show you.

The first is the distribution of returns for the S&P 500 over a 20 day (1 month) window.


The standard deviation is 4.6%.

That means, about 2/3rds of the time, we should expect the market to at most 4.6% up or down.

Sometimes it can be more, sometimes it can be less.

Now as iron condor traders... this is where we make our money. We don't want to see large price movement in either direction.

Well, what happens when we have a low VIX reading?


The standard deviation is now just 2.3%.

That means the actual volatility is much, much less in a low VIX environment.

Remember, with iron condor trading you profit as long as the market doesn't move around as much... and in a low VIX environment this is definitely the case.

Now you're probably asking... can I even get any kinds of profits from the market?

How the VIX Is Leading You Away From Earning Returns

When the VIX is low, you may think that there simply isn't enough option premium available to sell... that somehow the credit received is not that great.

That's simply not the case.

Remember, when you trade iron condors, you're selling out of the money (OTM) options.

And OTM options hold their premium much better than at the money options. They are less sensitive.

Think about it as a market maker. Say a customer comes to you and says they want to buy some puts that are 10% lower than current prices, and they want to pay only .10 for it.

That means, as a market maker, you only get 10 bucks per contract... and if the market does manage to crash, then you're on the hook for a ton of money. You're not going to take that trade... the tail risk is not worth it.

Iron condors not only take advantage of the premium available in the market, but also the tail risk pricing. It helps to push your edge even further.

The Downside Is Not A Massive Risk

Here's the thing...

When people ask me if it's a dumb idea to sell volatility when the VIX is low, what they're really asking is...

"What if the market crashes?"

And that's a fair question.

Let's take a look at an iron condor trade put on in a low VIX environment.

Now take a look at where the expiration breakeven levels are.

The upside is 2370...

And the downside is 2127.

That means you have about 100 points of upside "cushion," and about 150 points to the downside.

Why are they different?

It's because investors are always going to be scared about the downside, not the upside.

You can sell options that are further out on the downside because there is more premium available.

In fact, it's much easier to manage the downside risk than the upside risk.

Have a Plan in Place

It should be clear now that a low VIX is not something to worry about when trading iron condors. They can be the most lucrative periods for iron condor traders because the actual risk is lower, and the downside is actually a little easier to manage.

Yet you must make sure you have a plan in place if things move against you. Because at some point they will.

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Revealed: How to Prepare For the Next Big Move In The Markets

I remember it like it was yesterday.

In August of 2015, the S&P 500 sold off 3% in a single day.

400 points to the downside in the Dow.

The next day, we came off another 500 points.

We finished on the lows headed into the weekend, and then the following Monday the markets crashed.

The catalyst that set this all off was a surprise Yuan devaluation by the Chinese. This led to a series of events in the currency market, which triggered all sorts of nasty things in stocks. The market is now about 30% higher off those lows, but at the time it was pretty harrowing to watch.

Could it have been avoided? Could you have sidestepped costly losses in your portfolio or put on hedges that allowed you to safely navigate the market through an ugly period like that?

It can't be guaranteed, but it is possible.

I'm going to step through some of the warning signs you must watch, and what you can do right now to protect your portfolio.

Before we get started, I want to give you a warning.

You're not going to get an easy answer. There is nuance. I won't treat you like a child and try to scare you with end-of-world scenarios. If you're looking for a reason to sell all of your stocks, you won't find it here. Instead I'll show you what I'm looking at right now and the strategies you can use to protect yourself.

Watching The VIX

One of the biggest myths out there is that a low VIX means that it's time to sell stocks.

The usual story is that a high VIX means "fear" and a low VIX means "complacency." Well, that just simply isn't the case. In fact, when we have a low VIX it tends to lead to higher stock prices.

The concern you should have is a low sustained VIX... meaning when we have had complacency that has persisted for longer than a month.

Here's a chart with the price of the VIX removed, and only the 20 and 50 day moving averages. This allows us to look at the average close on the VIX over a 1 and 2.5 month timeframe.

This telsl us, that over the past month the average close on the VIX is right around 12. Since the market crash that has only happened one other time-- Summer of 2014. Back in July of 2014 the VIX had a closing level of 10.32%-- extreme levels.

Is it a warning sign? Yes. But it can take a while for actual selling to come into play. From that low VIX reading in 2014, it took a month to see any kind of selling in the market. It then took another 2 months before any true fear came into the market... and it took an Ebola scare for sellers to come into play.

The other thing to keep in mind is that the VIX is a measure of expected volatility in the future... so we should also look at past volatility to see how rich the premium is.

Here is a chart of the 20 day historical volatility in the S&P 500:

Over the past month we've seen an actual volatility of around 6%. That means if this volatility continues, then the VIX is actually still overvalued.

This means we have some small warning signs in the volatility markets, but it may take a while for them to actually work out.

What other warning signs should we look out for? Here's a simple one...

Bollinger Band Compression

If you want to look at how tight a market's range has been, simply look at the Bollinger Bands. This technical study can tell you how well the market has been trending, and identify powerful inflection points in the market.

Here is what the market currently looks like:

Over the past month, the Bollinger Bands have drastically compressed. This means that we have not seen any kind of trending action and the market has been very quiet.

When we see this kind of "pinch" in the Bollinger Bands, it means we have a high odds of seeing trending action soon.

This does not guarantee that the big move will be a selloff. In fact, it's possible to have a catalyst in the markets and we see volatility expansion to the upside. Yet most of the time... when we see volatility pick up it's because sellers found a reason to sell and the market is selling off.

Here's a better way to look at it. Instead of reading the bands, we can measure the distance between the upper and lower Bollinger Bands.

The Bollinger Band width on the S&P 500 currently sits around 1.7. That's not the lowest we've seen, but it's still quite low.

If you go back and look at other times we have hit these levels, they tend to precede a selloff. Remember, it's not guaranteed... a good example of upside vol expansion was in September o 2012:

The trouble I have with believing that we're due for a new bearish cycle is that we haven't truly seen the euphoria needed to really suck a lot of new people in. Which brings us to...

Watch The Lotto Stocks

There are a handful of names to follow that you can use to gauge how "hot" the market is getting.

When these names start to run it means the speculators are out in full force and feeling really comfortable in the market.

For a stock to get on this list, it needs to be a "brand name" stock that doesn't have a huge capitalization, or is a new issue.

A good example is BABA. When it ran from 82 to 120 in a month after it's IPO... that's how you know the market is starting to run hot.

Past "Lotto" stocks I've used in the past are GPRO, TWLO, BABA, DRYS, GMCR, CREE and a few others. Most of these names aren't on the list anymore because the market participants changed.

One of the reasons why I'm not super bearish here is that we really haven't had a new crop of runners pop up yet. One space I'm watching is the resurgence in the ag space-- stocks like POT and MOS.

So with this in mind let's talk about what I think will happen in the near term.

My Prediction On the Markets

A low VIX and low actual vol don't necessarily lead to market selloffs. I think it will, eventually, because stocks go up and down. That's just the normal cycle.

The market looks ready to be setting up for a breakout. So I don't think it makes sense to get aggressively bearish here... instead you want to start layering on hedges into that breakout.

So far, earnings season hasn't been a disaster. We are starting to see separation in the market, with large cap financials seeing some profit taking, while names like NFLX and TXN start to see breakouts.

My bet here is that we will rally into earnings season, and then investor psychology starts to anchor onto the next big Fed meeting, which is in the middle of March. We'll probably see profit taking and maybe a little fear into that event as we don't know what the Fed will do. We may get a little shakeout as the animal spirits in the market try to convince the Fed that another near term hike would be a bad idea.

Start looking for story stocks. NFLX is probably on there, so is POT. If they start running hard, that means we're close to a pivot high. From there you want to start looking at some smart long vol exposure.

How to Trade It

There are a handful of strategies to consider with this scenario.

Buy VIX Calls

Before I get started with this, remember that the VIX is a statistic. The actual numbers you're trading against are in the VIX futures.

So while the VIX is sitting at 12, the March VIX future is at 15.

The trade to look at is to buy the VIX Mar 15 Call for 1.50. This is not something you want to hold to expiration. Instead, you want to wait for the pre-Fed scare to come into play and then take profits into that.

The other reason I like VIX calls is that they are cheap.

Here is a chart of VVIX, which shows how expensive the premium is on VIX Options:

With any reading sub 80%, and you want to look to buy VIX protection simply because it's the best deal you can get right now.

Buy SPX Put Spreads

Look, buying puts straight up is fine if you absolutely nail the top, but if the selling comes a month later, then you're screwed because the time decay losses are larger than the gains you made from the selloff.

Instead, consider put spreads. They take advantage of another anomaly in the market right now.

Media preview

This is a chart of the SKEW. It shows how expensive out of the money puts are compared to at the money.

What this means is you can buy put spreads and reduce your overall cost and risk through this.

Consider this trade: Buy to Open SPX Mar 2260/2200 put spread at 13.80... you can also do a similar trade in the SPY options.

With this spread, you're buying the 2260 at a vol of 11.42%, and selling the 2200 at a vol of 13.44%.

All you'd need is a 30 point move to the downside and you're in the money.

Now at this point, I wouldn't consider this trade... but if the SPX ran to 2300 on a clear breakout, then I'd start layering into these spreads.

Sell Spreads in Individual Stocks

One more edge we can pull out of the market...

Stock correlations have, and continue to be incredibly low in the markets.

That means stock picking continues to be a form of risk management.

Here are some of my recent trade ideas:

How to Profit From The Next Move In The Banks

Look for This Stock to Breakout into Earnings

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How To Profit From The Next Move in the Banks

Let's face it, the past month has been boring for stocks.

The S&P 500 has been stuck in a super tight range, and while there hasn't been much movement on the surface, a few select areas have been undergoing rotation.

With bank earnings out of the way, we're starting to see volatility pick up a little bit.

In the next few minutes, I'll show you a setup on a bank stock that could potentially lead to easy profits.

Let's take a look at the whole space first.

Parabolic Moves

If there is one sector that the election helped, it was the big banks.

After the elction results, the sector went straight up... and after resting for about two weeks, the sector continued to run in anticipation of a Fed rate hike.

Remember... rising rates actually boost the earnings of large banks.

Here's some statistical analysis of how the sector traded:

In a one month window, XLF had rallied over 15%. And at one point, the sector ended up 14% above it's 50 day moving average.

To put that in context... that's the largest overbought reading we've seen in over 5 years.

Clearly the sector was pricing in perfection... investors are expecting the repeal of Dodd-Frank, and the Fed hiking rates led even more investors to pile into financials.

What Happens When Perfection is Priced In

Now a funny thing happened after the rate hike... the sector didn't move.

At all.

This is a great example of how a stock or market can run in anticipation of an event, but after the event happens it's already priced in. It's what we used to profitably trade TLT into the Fed meeting.

Now we have some news that is causing the sector move again. Bank earnings are out on some key names - JPM, GS, BAC, MS and others.

So far, the reaction seems to be muted.

On some names, the stocks are selling off as investors are taking profits... there's probably an air of disappointment as the stocks didn't continue to run higher after the event.

I think that disappointment will build on itself as late buyers of tehse stocks get stopped out, and anyone that does want to re-buy is going to be a little spooked with some selling.

Now is Not The Time to Get Bearish

I don't think that getting aggressively short these names is a good bet.

Remember, when stocks get overbought, there are three ways they can correct.

  1. Price Correction - where we see sellers come into play
  2. Time Correction - where the stock goes sideways as market participants churn
  3. Momentum Correction - where the stock continues higher but with a slower rate of change

We've already seen a time-based correction in financials. And once the initial shakeout is done, buyers will step in quickly to scoop up shares.

So now is the time to start planning the levels where you want to buy the dip.

Let's look at one of my favorite stocks to trade- Goldman.

Big Support in Goldman Sachs

After an incredible rally from 160 to 240, the stock has gone sideways for well over a month. Earnings are out and the stock is now in control of the sellers.

There are two major levels to watch. The first is the rising 50 day moving average, currently sitting at 225.

The second is the pivot level from the most recent breakout right around 215. Those are the two levels where we have a high odds of buyers coming back into play.

How to Profitably Trade a Pullback

With this kind of setup, it's best to look at where the market won't go rather than trying to nail the exact bottom.

This is where bull put spreads come into play.

Consider this trade:

Sell to Open GS Apr 205/200 Bull Put Spread

The current price for this spread is sitting at 0.62, but if the stock breaks under 230, then the value will be going for 0.80.

If you want to be a Proactive Trader, you can simply place a GTC LMT order at 0.80. You know that's a good risk/reward area... you can place the entry and simply walk away.

No need to stare at the charts for 6 hours a day. No need to be glued to your smartphone waiting to execute on the trade.

This trade makes money if GS goes higher, or if it continues to stay within a tight range.

There's one more step to consider to make sure you really nail the trade:

Scaling In

Here's the thing about buying pullbacks... there's no true way for you to know that you'll nail the exact bottom.

I see this a lot in new traders. They go "all in" at a level that they believe with all their heart will hold.

And then it doesn't.

And they lose money, and feel bad... maybe stop out only to see the market reverse in their favor, or hold for much longer than planned.

It can be really frustrating to watch.

A simple fix is to scale in to your spread trades.

So the initial entry is for 0.80, then add to the trade at 1.10 and 1.40.

That way if the stock continues to move down, you're prepared to add to the trade at better prices.

Become a Consistent Trader

So successfully sell option spreads, you need to be Proactive.

Pick your levels.
Price your spreads.
Use limit orders.
Scale in.
Scale out.

That's the recipe for success.

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How I Found The Bottom In Gold

For the second half of 2016, it looked like all hope was lost for gold.

Back in September the shiny metal had a massive move to the downside, and then recovered nearly all of those losses...

Only to have the post-election reaction bring sellers back in as it broke key support.

Yet into this bloodbath, I was able to earn consistent profits by finding an edge and using smart trade methods.

In the next few minutes, I'd like to show you how I did it.

The Selloff

Here is a chart of GLD, the most heavily traded gold ETF:


In terms of support from previous pivot levels, there wasn't any until about $100 per share. It was just a big gaping void to the downside.

Yet, we were starting to get oversold on a statistical basis...

Here is a technical study I use called a Rolling Returns chart. It shows the performance of an asset over a specific window... in this case it is 20 days, which is 1 trading month.


Back in early December, GLD had sold off over 10% in a month. Looking at this chart, it appears that this hasn't happened the entire year.

So I sat back and asked myself two questions...

  1. How often does a 10% selloff happen? And...
  2. What happens after that selloff?

Answering these two questions can help me discover whether it's good risk/reward to enter these trades.

How did I answer these questions? Let's dive in.

Finding the Quant Data

Here is another chart of the Rolling Returns, but instead of looking at it over time, we stack all the values on top of each other to make a distribution.


So you can see that this pretty much looks like a bell curve-- a lognormal distribution.

Further, you can see that we don't have a 10% selloff very often.

If we look at the statistics, we can see that the average 20 day return is right around 0.6%, and the standard deviation is right around 5%.

That means a 10% selloff is a 2 standard deviation move.

This is statistically significant and worth watching.

Moving onto the next question...

Finding the Results

I looked at how GLD performed 20 days later *after* a 10% selloff. Here are the results.


While this isn't a huge sample size... it's something worth looking at.

The majority of the returns are positive, meaning that when the market sells off over 10%, we tend to have higher prices within the next month.

The average for this is 4.2%, and the standard deviation still sits around 5%.

Finally, the worst loss GLD had was right at -7%.

Finding the Floor

Back on December 5th, that's when we saw our GLD under 10% reading.

It was trading at 111.54.

Now just think about this... if we know that over the past 10 years the worst move was down 7%, then we can expect that to be the absolute worst case scenario.

7% off of 111.54 is...


Simply put, anythiing between the current price and 103 offers good risk/reward for a bounce in GLD.

Now is it possible that we see a worse kind of move? Sure... but this is a commodity not a stock so it's not going to have earnings or a bad FDA event.

What's more, we were headed into the holiday trading season which meant lower volatility and higher odds of reversion.

Now the question here is... can you structure your risk in a way that makes sense?

The Option Trading Strategy

With this kind of approach, you should look at selling credit spreads to further put the odds in your favor.

In this case, it was a bull put spread in GLD.

Here was the exact order:


Some things to pay attention to:

  1. Go further out in time. This allows you to have more "wiggle room" to manage your risk in a trade.
  2. Scale into the trade. Don't go all in when you know the natural volatility of the stock will probably put you in better prices.
  3. Don't hold to expiration-- scale out. You tempt the market gods by trying to get that last 10 cents of credit.

The analysis of GLD is where I found the trade idea... but the execution is where I find my edge.

Get this Done For You

Now you can go and do this all on your own.

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Look For This Stock To Breakout Into Earnings

Today I want to reveal to you one of the best looking technical setups in the market right now.

But first, let's talk some football.

Over the past month, there has been so many amazing college football games on TV. The Rose Bowl was an instant classic. Both Alabama and Clemson put on defensive performances that were a work of art. It's been a fun ride.

Yet I know many don't share my view.

Over the past few years, cord-cutters have continued to end their subscriptions.

Plain and simple... some people just don't like to watch live sports.

Instead, they binge watch shows on Amazon and Netflix.

The most recent show on Netflix that is getting a ton of attention is "The OA." Now I watched it, and it definitely wasn't for me but it's good enough to get a second season.

Here's the crazy thing-- Netflix spent about $6 billion on original shows in 2016, and they plan to ramp up spending even more into this year.

And it appears to be working... let's have a look at a weekly chart of the stock.

The Massive Basing Pattern


After having some trouble back in 2012, the stock bottomed out and has been in a slow and steady uptrend ever since. In early 2015 the stock topped out... right after the stock split. Since then it has een in a range between about 90 and 130 for basically two years.

Recently, the stock had a massive move on earnings and has been consolidating just underneath recent resistance. We can call this a cup and handle pattern. 

Now let's zoom into a shorter term chart...

Look To Drift Higher


On the previous earnings report the stock had a massive gap higher and then a few more days of momentum into resistance.

Since then, the stock has been in a pop drop and chop pattern, where the stock popped on earnings, dropped as momentum waned, and then has chopped around this entire time.

Here's how I think this stock will play out...

The Upcoming Catalyst

When a stock has this pattern, many times it will drift higher into its next earnings event. Basically, anyone that bought before the previous earnings is in a position of strength and is willing to hold the stock through the next earnings.

Sellers just run out.

This is called a pre-earnings run.

Now combine that with the fact that we have a 2-year long resistance level right at 130. If the stock manages to break above that, then the momentum players will pile back in as it breaks to new all-time highs.

The positive feedback loop will build on itself.

My initial target for the stock is 140, and I think that into this year... if the breakout holds... it will be one of the more healthy trends in the market.

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