Beware The Siren Call Of The Iron Condor

But my gut response was to eschew iron condors.  Why?  Look at this chart:

The first thing I notice is that the volatility is in the absolute basement.  Now, as I noted in an earlier post, low volatility doesn’t necessarily mean the trader should buy it instead of selling it.  But is it worth selling it at such low levels?  Granted, the volatility could remain low for a long time, and the market might cooperate for a long time, in which case selling IC’s would be a great thing.  But the problem comes when the market decides to move and the vol decides to pop.

Second thing I notice:  Combine the sickenly-light volume with the overhead resistance, and I don’t think selling IC’s right now is the thing to do.  And I’m not preaching my usual “the sky is falling and therefore the market must fall, too.”  I could also envision a sharp rise in the market, breaking through those old highs on light August vacation volume if, for example, Europe produces a bailout plan for Spain….short-lived as any rally might be.

So, after waving the yellow flag why did I add this iron condor to my model portfolio?  Because it’s a nice hedge against the long volatility plays that we’ve also been looking at, such as on AAPL.  The iron condor will help offset not only some of the time decay of these other trades, but also some of the drop in volatility if the VIX decides to drop any further.

By the way, I had a coaching student pose the question:  When would you no longer consider selling IC’s as a standalone trade?  My answer:  Probably when the VIX drops below 15.  That’s not a magic number.  It’s just that, a number.  But it’s near the low end of the range, and can give guidance to those that feel more comfortable with rules.  My real answer would be:  Don’t sell IC’s when you think the market could move, or the vol could jump.

Submitted by Greg Loehr of Options Buzz

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