What do we know when we start an iron condor trade?
Let's take a look at the two of the option greeks.
First... Delta. I've talked about this plenty of times, but iron condors are not "market neutral" trades. They start off slightly bearish.
The other greek you have is vega. This is related to the implied volatility.
Now here's the "weird" thing about the relationship between these two... when the market sells off, implied volatility goes up.
And when the market rallies, implied volatility goes down.
See where I'm going with this? See how this can be a bit of a problem when starting off the trade?
It doesn't look like you can have it both ways... but in a few cases you can.
Double Your Edge With Iron Condors
Think about it: what kind of market will see stocks pullback along with implied volatility?
The first bounce.
During a market selloff, option premiums run stupid hot... but if you sell iron condors into the hole, you take on a TON of risk if the market bounces.
But if you wait for the first bounce... the option premiums still tend to stay elevated.
You get a "double edge" with your iron condor trading.
Case Study: August 2019
Back at the beginning of August, China adjusted their currency which led to a massive gap down lower. Just three days later, the market had retraced nearly half of the move:
What happens next? The market goes into a range for a month, and the VIX drifts lower over time... that's because if you're an investor who hedged, you don't need to "re-hedge."
How I Traded It Live
Here was the trade video I sent to clients at IncomeLab.. you'll see my full explanation as to why I love putting on iron condors on the first bounce.
This trade was closed out for a profit of 1.65 per spread, which is a 20% return on risk.