Feb 5, 2010
VIX spiked again this week as downside volatility returned to the market. Although the end of day market rally provided some confidence, VIX closed above last weeks high.
Wanted to ask about timing when starting condor legs. I know that ideally we enter positions when volatility is high and then decreases. But at least lately I’ve noticed I can only get a good price on legs the market is moving against. For example, when RUT was moving down I could get 50 cents from a bull put spread with a delta of .08 but only 15 cents from a bear call spread with the same delta. On top of that, the put position was about 100 points away from the money while the call position was only 70 points away. Does that mean if I want to buy two legs at the same time, I should wait for the market to be flatter?
Your observation has nothing to do with ‘moving against.’
1) Equidistant spreads (assuming you are referring to out of the money options): Puts, having a significantly higher implied volatility, trade for higher prices than call spreads.
They also have higher deltas and thus, change price more rapidly than call spreads
2) Terms such as ‘bull put spreads’ confuse me. I don’t know if you are buying or selling that bull put spread. You just don’t think it’s important to mention that.
It’s wrong to assume that using a descriptive phrase for a spread means you are a buyer. Each spread – no matter how you name it – can be bought or sold.
OK. End of rant.
I assume you are ‘SELLING A PUT SPREAD’ (a nice clean phrase, with no possibility of anyone not understanding what you are saying).
3) When the market is declining and when IV is increasing (and these go hand in hand most of the time), all spreads tend to widen. You can get a good price when selling the put spread because buyers want put protection. You are selling what they want to own.
When you sell the call spread (isn’t that simple? Why call it a bear call spread?) it’s more difficult to get a good price. That’s because it has a small delta and the spread value doesn’t change by much when the underlying move by one point.
When you say the spread had a delta of .08, I find that difficult to believe. Do you mean that the option you are selling has a delta of 0.08?
4)I am not a fan of legging into iron condors. It depends on which leg you take first and why you are taking it.
When you sell the put spread first, it takes a big move to get that 15 cent call spread to a price that will make it attractive to sell.
If you get that move, it’s better to just close out the put spread and take your profit.
If you sell the call spread first, and if you are correct that the market will decline, then taking the leg can pay off because the put spread you plan to sell should widen.
You are correct I meant ‘sell the put spread’ as well as ‘sell the call spread’. heh, I think I’ve finally learned your point (after you’ve patiently reminded me on 3 separate posts).
This thick-headed investor gives you thanks.
It’s a pet peeve of mine.
Too many descriptive words are not helpful
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