The markets crashed and we're feeling plenty of aftershocks. A 1% gap overnight is not only possible, but happens all the time.
30 handles in the S&P? All we need is someone from the Fed to open their mouth and we'll see that in 30 minutes.
With all the volatility in the market, it seems like putting on iron condors or other income trades would be a terrible idea.
But there are simple tweaks you can make to get the best reward for the risk you take.
The Big Risk in Iron Condors
Iron condors do great in every kind of environment except one:
This means a strong move without little reversion. This can come with a one-directional rally like we had in 2013, or in a market crash like we had recently.
If you can manage your risk against trending volatility, then you will be a consistently profitable iron condor trader.
Well, what if the risk for trending volatility is really high?
What if the market sees another waterfall collapse off the back of Chinese currency intervention?
Or perhaps, what if there is a whisper of central bank intervention that causes a massive short squeeze?
It's Already A Little Priced In
Odds are if you are aware of the risk, so is everyone else.
And the options market responds to these new risks. Here is a chart of the VIX post-crash:
When fear is very high in the markets, the risk premium in options also rises.
Iron condors profit from the decay in this premium, and if the premium adjusts higher for new perceived risk you are able to capture more premium in your iron condor.
On top of that, the premiums expand on further out of the money options-- this is related to tail risk and option skew.
With higher premiums available, you are able to select option strikes that are further out of the money to trade.
This all makes sense-- the tradeoff with higher risk in the market is the potential for higher rewards *or* higher odds as you can pick up options further away from price.
What simple tweak can we use to reduce the headaches in our iron condor trading?
Unlike what most people think, iron condors are not a "set and forget" strategy. It's a dynamic trading strategy and you can get an extra edge through scaling and appropriate use of position size.
Let's take the iron condor posted above as an example.
It's the Nov 1710/1720 2050/2060 Iron Condor.
The big risk here is if SPX sees a big selloff or a massive rally.
But since this is a high volatility environment, I went half size on the iron condor.
If SPX moves big to the downside, I'll roll the put side lower and double the size.
And if we see a big move higher, I'll roll the call side higher and double the size.
By having a pre-planned add to the trade, I'm able to adjust my odds as the market moves without a significant reduction in my potential reward.
If you'd like to see how I trade Iron Condors, I've created a training course that gives you everything you need to become consistent with this option trading strategy. Simply click the button below to enroll in the course.