Implied Volatility (IV) is still frustratingly low. We prefer to be selling premium but with IV and IV Rank (IVR) being as low as they are selling Strangles does not make sense. Many of our viewers like to sell Iron Condors but given the low IV those trades don’t make sense either so some of our viewers emailed us asking about buying Iron Condors under such low IV conditions. Would a long tighter Iron Condor, which would benefit from a rise in IV, be a money making strategy in this low IV environment?
Our study was conducted in the SPY (S&P 500 ETF) using data from 2005 to the present. Using options in the expiration cycle closest to 45 Days To Expiration (DTE), we bought an Iron Condor consisting of a long Vertical Call Spread paying a minimum 25% of the width and a long Vertical Put Spread paying a minimum 25% of the width. The spread width was determined by 2.2% of the current SPY price ( 5 point wide spread) We then managed winners at 50% of max profit (if possible), or held to expiration.
A results table of the long Iron Condors, both those managed at 50% or held to expiration, was displayed. The table included the average debit as a percentage of the width, average P/L, success rate, average profit and average loss. While managing profits did boost the win rate it did not make the trade net profitable on balance. A second results table using the same metrics compared the long Iron condors in IV Rank below 25 to all IVR environments. This table showed that even a lower implied volatility did little to benefit the strategy and the average P/L was still negative. This again showed us that we always sell premium and that long premium trades are tough in any environment. Tom noted, “This study is a validation of what we do, why we do it and why we spend so much time hammering home the same message, because it’s critical stuff.”
For more information on Buying Premium see:
tasty BITES from February 10, 2015: "Buying Iron Condors"
Market Measures from July 14, 2015: "Long Straddles into Earnings"
Market Measures from April 14, 2016: "Buying Puts into Earnings"
Market Measures from April 26, 2016: "Buying Premium Before Earnings"
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the results of our study on buying tight Iron Condors in low Implied Volatility environments.
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