Iron Condors and Soaring Option Volume

(Reuters) – Growing concerns about the economy and markets sent volatility soaring on Wednesday [Oct 15, 2014] and pushed trading volume in the U.S. options market to its highest level in more than three years, as traders moved to hedge their portfolios on fear of further market gyrations.

You can read the whole article at the Reuters site.

Is it time for Iron Condors?

The increase in implied volatility suggests that investor complacency may have ended and that fear has returned.

The question for traders is whether it is time to adopt premium-selling strategies (the iron condor, for example), or if it is better to wait for even higher volatility. One thing is certain: getting into this game before the volatility highs have been reached is a treacherous undertaking. I recommend waiting because it is better to avoid iron-condor risk when we do not know whether the current period of increased volatility is just beginning.

My advice: If you are an experienced iron condor trader, it is okay to nibble, but I would not want more than 20% of my cash (the cash set aside for strategies such as the iron condor) in play at this time.

One Response to Iron Condors and Soaring Option Volume

  1. Matt 11/01/2014 at 8:16 AM #

    I tried a technique to hedge an IC that I’ve never tried before I’d enjoy your opinion; The IC expires 4th week of Nov, but I bought a call spread that expires next week. My intention is to close the IC if it goes any higher (Probably a topic for another question, but I’ve never been good at rolling the call side up higher so I was just going to get out and take my lumps), but I thought if the market goes higher next week (which I think it will) that credit spread will gain more than the IC loses (because it expires earlier) and when I close it I’ll recover some money. Of course if it goes down slightly, I lose on the weekly spread, and if I don’t close the IC I’m in the same boat for next week… Anyway, do you have an opinion on using weekly expirations to hedge an IC?


    Matt,
    The idea is sound.
    Owning a near-term call spread offers excellent (upside) protection against a longer-term iron condor – assuming
    a) that the strike prices are less far OTM than those of the iron condor.
    b) the quantity is sufficient (it does not have to be one for one, but it cannot be one for 20).

    Sure you lose the cost of the call spread if the market does not move sufficiently higher, but that is true of any insurance policy. You buy it for protection – not to make a profit. So if it turns out to have been unnecessary, then the cash paid for insurance is lost. That’s okay.

    As you mention, managing the risk of the iron condor is a separate issue, but with insurance, you buy yourself some time.