Q&A. Iron Condors, Double Diagonals and Impled Volatility

More questions from Don:

IV [implied volatility] and the pricing of IC [iron condors] and DD [double diagonals], you mentioned that trading IC works
better when IV is high and that DD are better when IV is low…but
those are relative…yes the IV affects the price, but it affects
ALL four components relative to each other so that their relative
profitability towards each other is the same?

with DD's but it may be different because of the calender component.
Doesn't IV affect the front month more than the back


For my comfort zone I prefer to trade iron condors when IV is elevated.  When I believe (obviously I cannot be certain) IV is at the lower end of its range, I prefer to trade double diagonal spreads.

This concept is explained in The Rookie's Guide to Options.

For those unfamiliar with the strategies, the iron condor is constructed by selling a call spread and a put spread in the same underlying asset and for the same expiration.

The double diagonal is similar to the iron condor, except the options you buy still have the same strike price, but they expire one month later.

1) The major reason that my strategy selection depends on IV is based on the nature of these positions.  When you own the double diagonal, you effectively own the iron condor plus two calendar spreads.

When IV increases, the value of a calendar spread increases.  That's another way of saying that DD spreads have positive vega.  Positions with positive vega do well when IV increases.

Thus, I buy these positive vega positions when IV is low and  the chances are good that IV will be higher (than it is now) when the front-month options are about to expire.  If IV has increased, I will get a good price when I exit the position and sell my longer-term options.  If IV has declined, I will be forced to exit my position at less favorable prices.

Iron condors have negative vega and do well when IV decreases.  If that IV decrease is significant, it's often possible to exit the trade with a quick, but good-sized profit.  Because these spreads do well in a falling IV environment, I prefer to own them when I believe IV is high and likely to fall.

It's not complicated.

If any iron condor trader wants to own a portfolio that has very limited volatility risk, it's a simple matter to add some double diagonals to the position mix – enough to turn the portfolio vega neutral.

2) Your point about the option prices moving in tandem is not accurate.  When you are selling OTM call and put spreads, those spreads widen as IV increases because the options which you sell have more vega than options you purchase.  That's why the spread has negative vega and it's the reason that higher IV means you can get a higher premium when you sell these put and call spreads.

3) It is true that a rising IV environment usually imparts a larger percentage increase in the IV of the front-month options.  But you do not trade percentages; you trade dollars.  Longer-term options have more vega than their front-month counterparts.  Thus, even though the IV increases by a smaller percentage, it increases by more dollars.  In other words, the premium increases more for the long-term option than the short-term option.  That's why calendar spreads widen (become more profitable) as IV increases.


I have difficulty reconciling "buying a spread" netting me money and "selling
a spread" costing me money so I have just used trading a spread for ease of


When you buy an iron condor you sell the call spread and the put spread.  That means you are buying the iron condor and collecting a credit.

There is no official nomenclature for the options world, and to me, that's a shame.  Many people feel as you do and use the term 'sell' an iron condor when I would say 'buy' the iron condor.

There is a rationale for this, but it's lengthy.  In summary, when you buy a condor spread, you profit when the stock remains between the strikes.  The 'iron' variety of the condor should profit under the same circumstances.  Thus, logic tells me that if I'm buying the condor, hoping the stock remains within a price range, then I'm also buying the iron condor when I also want the stock to be range-bound.

One further point.  Suppose you want to trade a diagonal spread – for example the XYZ Dec 100/Nov 95 call spread.  Your goal is to own the Dec call and sell the Nov call, and you tell the broker to buy the spread and pay a 10 cent debit.

When your broker comes back and reports that you 'bought' the spread at your price, a 10 cent debit, and that you own the NOVEMBER call and sold the DECEMBER call, you will be very disappointed.

What do you do if his explanation is this:  You said 'buy' the spread, so I bought the higher priced option (NOV) and sold the lower priced option (DEC).  How can you complain?  Doesn't that fit your description of buying the spread?  You bought whichever option was higher priced and therefore paid a debit.

That's why 'pay a debit' is insufficient to distinguish between buy and sell orders.  At least in my opinion.

there's still more from Don…


9 Responses to Q&A. Iron Condors, Double Diagonals and Impled Volatility

  1. Mike 10/15/2009 at 9:06 AM #

    Mark, are prices of options based on the contract or the number of shares in the contract, for instance today there were 20,000 call options sold on E*trade today for .20 cents, will the person who bought it get $400,000 or $2,000? Thanks!

  2. Mark Wolfinger 10/15/2009 at 9:16 AM #

    Hi Mike,
    1) The option price (premium) is on a per share basis.
    Thus, one contract @ $0.20 is worth $20.
    2) 20,000 contracts = $400,000
    3) Is this a trick question? The ‘person who bought it’ PAYS (not receives) that $400k.

  3. Mike 10/15/2009 at 9:21 AM #

    Thanks, I was confused, but now I understand.

  4. Don 10/15/2009 at 2:02 PM #

    Hi Mark…the explanations just get better and better (or maybe I understand more) read your comments especially about Vega and IV and was curious if MM or experienced traders trade IV for profit? Are there successful traders that either expolit volatility or perhaps minimize volatility for theta decay or some other trade idea?
    The IC trade I sent to you last week had a Vega of about -160. After reading your post today I experimented with some DD and found that 4 of them carried a +160 making that combined aspect of my portfolo Vega nuetral. This is what you mean when you are talking about adding DD’s into the IC “mix” is that correct?
    Really, thank you for the posts, looking foward to them as always!

  5. Mark Wolfinger 10/15/2009 at 2:31 PM #

    Yes, many trade IV for profit. It’s an excellent idea when you know how to go about it. I have not tried to do this on other than an elementary level: Own vega with I think IV is low and sell when I believe it’s high. But that’s very unsophistiated and thee are better and more complex ways to take advantage of IV.
    Minimizing volatility risk is another matter entirely, and it’s easy to do. Just flatten out vega by making suitable trades. Need positive vega, buy a calendar spread, double diagonal, or just some naked long options. So the answer is ‘yes’ – your exa,ple is exactly what I was describing. DD + IC gives you (in this example) zero vega.
    Want to sell vega, sell call and/or put spreads.
    Those are very simple ideas, and you are not limited to those.
    To minimize theta, one generally has to sell options or spreads. But those who exploit IV to make their living must have tools in place to minimize theta risk.

  6. Rob1 10/16/2009 at 12:24 AM #

    A Rookie Question: I sold 4 GOOG 560 Oct expiring naked calls recently and now its going to come down quite a bit 2morrow morning. I think tomorrow it might get down to 0.10 or even 0.00 (as long as GOOG does not go above 560. Do I still have to buy it back. What if at the end of the day GOOG stays about $558 and I still get assigned with the option. I will have to come up with $400X558 (whatever that is) to give this person his shares. Can someone do that? I mean can someone ask for buying the shares although the market value of the shares is below the strike. Lets say I wanted to buy GOOG on Friday and didn’t get filled. An on Sat I thought well…lets just get it through the guy who sold me the call option at $560. In that case i will have to find a lot of money and buy shares and give him that. Could this be possible? ….Am I making any sense BTW!

  7. Mark Wolfinger 10/16/2009 at 8:22 AM #

    Good morning.
    Have to buy it back? You NEVER have to buy it back. You are allowed to let the options expire worthless. Buit be warned, some brokers will force you to buy the options today. They do not allow any customers to own a position that can result in a margin call – due to an exercsie. You would have to ask your broker if you are allowed to watch the options expire wowrthless.
    If you are truly a rookie, why are you selling naked call options? Why does your broker allow that? It’s a pretty risky strategy.
    GOOG is up to the mid 540s before the market opens, and the market futures are lower. If this market turns around – and I am not saying it will – GOOG could easily run past $560. Far higher.
    It may be a ‘waste’ of money, but I would certainly pay $0.05 of $0.10 to get thsoe options out of your account.
    My guess is that the price will be highr early in the day, but if you want to buy them – enter an order now, before the market opens. a LIMIT order, never a market order.
    If you don’t want to ‘waste’ the money, you are NOT obligated to buy them
    NO. You are not buying the stock, and don’t need cash. You need assets to meet the margin requirement. You would have a short position of 400 shares. I’m sure you cannot meet the margin requirment for that, and your broker will force you to buy the stock on Monday. Why take that risk. Who knows what the price would be at that time.
    There is almost zero possibility that you will be assigned if GOOG is less than $559.99. Buy yes, someone can do that. The call owner has the RIGHT to buy the stock at any time prior to expiration. The actual stock price determines whether the call owner will elect to buy the stock at the strike price. But, no one can prevent the person from exercising. It’s his/her option and you have no voice in determining if/when the option can be exercised.
    Yes, you are making sense. But, Saturday is too late to exercsie the option. This afternoon is the deadline.
    Don’t take this wrong: If you do not understand how this works, if you don’t understand the risks you are taking when you sold thsoe options, why did you make this trade? This is important: Please understand all the risk and reward potential for any trade BEFORE you get involved. It is not a trivial matter.
    But there is a risk to doing that.

  8. LEO 10/19/2009 at 2:50 PM #


  9. Mark Wolfinger 10/19/2009 at 4:28 PM #

    I had never heard the term ‘theta scalping’ before your question arrived.
    I may be wrong, but as far as I can tell it’s a phrase made up by someone who makes a lot of impossible promises in an attempt to scam investors.
    The claim is that it is similar to gamma scalping.
    If this is a legitimate options term, I apologize, but I don’t know what it means.