Iron Condors: My Backtested Strategy for Stable Returns | Options Jive

tastylive

28 Jun 202308:44

Summary

TLDRIn this financial discussion, the team explores trading iron condors in a low implied volatility (IV) environment, noting that despite being a popular strategy, it's more challenging to execute profitably in low IV conditions. They analyze the performance of iron condors with different wing widths and find that wider wings perform better in low volatility markets. The presentation also touches on how IV rank and market conditions impact returns and volatility, concluding that wider iron condors offer more consistent returns, while tighter condors may be preferable in bear markets to limit losses.

Takeaways

📈 The current market implied volatility is near its lowest point in recent history, significantly lower than the long-term average since the beginning of the COVID-19 pandemic.
🔢 The 15-year fixed average implied volatility is 16.5, while the current trading level is around 13, indicating a nearly 20 percent decrease.
🦅 Iron Condors are a popular option strategy in low implied volatility environments due to their delta neutral nature and ease of execution.
💰 Iron Condors are attractive in low volatility conditions because they require a relatively low amount of buying power and offer a credit for the spread sold.
📉 In low implied volatility, it's harder to execute Iron Condors profitably due to the reduced premium and narrower profit zone.
📊 The performance of Iron Condors is influenced by the width of the wings selected, with wider wings potentially offering better results in low volatility markets.
📉 Iron Condors are traditionally built for high volatility environments, but the selection of wings can help balance risk in low volatility conditions.
📅 The study analyzed 45-day to expiration Iron Condors with different wing widths, managing positions to 21 days to expiration or 50% of max profit.
📊 The implied volatility rank does not significantly impact the probability of profit for Iron Condors, indicating market efficiency.
💹 Wider Iron Condors showed a higher return on capital and slightly lower position volatility, especially when implied volatility is higher.
🐂 In bull markets, wider Iron Condors perform better, but in bear markets, smaller Iron Condors may provide better returns on capital with higher win rates.
📉 During bear markets, although monthly volatility is higher, the win rate for Iron Condors increases, making smaller Condors a potentially better strategy.
📈 In the current slightly bullish market with decreasing implied volatility, wider Iron Condors can offer better returns while lowering position volatility.
📉 Wider Iron Condors are generally more reliable and consistent in returns, but tighter Condors may be preferable during extended sell-offs or bear markets to limit losses.

Q & A

What is the current implied volatility level in the market, and how does it compare to the long-term average?
-The current implied volatility is hovering near its lowest point in recent history, trading around 13, which is almost 20 percent below the 15-year fixed average of 16.5.
Why is the Iron Condor considered a popular option strategy in the current market conditions?
-The Iron Condor is popular because it is a delta neutral, easy-to-execute strategy that involves selling a short call spread and a short put spread simultaneously, and it is relatively cheap to execute given the low implied volatility environment.
What is the main challenge when executing an Iron Condor in a low implied volatility environment?
-The main challenge is that you're collecting less money and have a narrower profit zone due to the lower expected move, making it harder to rationalize the execution.
What is the difference between an Iron Condor and a Strangle in terms of risk and reward?
-An Iron Condor is a more conservative strategy built for high volatility, aiming for the stock to end up in the middle of the range, while a Strangle is a more aggressive strategy that benefits from larger moves outside the range.
How does the width of the wings on an Iron Condor impact its performance in a low volatility market?
-Wider wings, such as 20 dollars apart, have been shown to perform better in a low volatility market, offering a hybrid between a Strangle and an Iron Condor.
What is the typical management strategy for Iron Condors in terms of days to expiration?
-Iron Condors are typically managed to 21 days to expiration (DT) or 50% of max profit, whichever comes first, with the former being more common.
How does the implied volatility rank affect the performance of an Iron Condor?
-The implied volatility rank does not significantly affect the probability of profit (POP), as the market is efficient regardless of the IV rank. However, it does impact the return on capital and position volatility.
What is the impact of market conditions (bullish vs. bearish) on the performance of Iron Condors?
-In a bull market, wider Iron Condors perform better due to the smaller velocity of moves. In a bear market, smaller Iron Condors may perform better, with a higher win rate and slightly better return on capital.
What is the recommended strategy for Iron Condors in the current slightly bullish market with decreasing implied volatility?
-Using wider Iron Condors, such as 20 wings on SPY, can help achieve better returns while lowering position volatility in the current market conditions.
What are the final takeaways regarding the use of Iron Condors in different market conditions?
-Wider Iron Condors offer the most reliable and consistent returns regardless of the IV rank. However, in an extended sell-off or bear market, tighter Iron Condors may be better to limit losses while still generating a decent return on capital.
Why is it difficult to determine the optimal Iron Condor strategy in real-time market conditions?
-It's challenging to predict when the market will enter an extended sell-off or bear market, making it hard to choose between wider and tighter Iron Condors for optimal performance.

Outlines

00:00

📈 Trading Iron Condors in Low IV Environment

The video script discusses the strategy of trading Iron Condors in a low implied volatility (IV) environment. Iron Condors are popular due to their delta neutral nature, involving the simultaneous selling of short call and put spreads. The current market IV is significantly lower than the long-term average, making it harder to execute Iron Condors profitably due to the reduced premium and narrower profit zone. The script introduces a comparison of different wing widths for Iron Condors in a low volatility market, suggesting wider wings might be more suitable. It also touches on the performance of Iron Condors based on IV rank and market conditions, indicating that wider wings perform better in a bullish market while tighter wings could be preferable in a bearish market to limit losses.

05:01

📊 Iron Condor Performance in Bullish and Bearish Markets

This part of the script explores the performance of Iron Condors in different market conditions. It reveals that wider Iron Condors perform better in a bull market due to the smaller moves and lack of volatility expansion. Conversely, in a bear market, smaller Iron Condors have shown to be more effective, although the monthly volatility is higher. The script also notes that the return on capital is slightly better with wider wings, and the position volatility is lower. The takeaway is that wider Iron Condors offer more consistent returns regardless of the IV rank, but tighter Iron Condors may be more suitable during extended sell-offs or bear markets to limit potential losses while still generating a decent return on capital.

Mindmap

Keywords

💡Implied Volatility (IV)

Implied Volatility (IV) is a measure of the market's expectation of a security's volatility over a specified period. It is derived from the price of the options themselves and is a key component in determining the value of an option. In the video, IV is discussed as being near its lowest point in recent history, which is significant for trading options like iron condors. The script mentions that the current IV is around 13, which is almost 20 percent below the 15-year fixed average of 16.5.

💡Iron Condor

An Iron Condor is an options trading strategy that involves selling both an out-of-the-money call spread and an out-of-the-money put spread on the same underlying asset and expiration date. It is a delta-neutral strategy that aims to profit from a stock's price remaining relatively stable. The video discusses the popularity of this strategy in a low IV environment and how it is executed with different wing widths to adapt to market conditions.

💡Delta Neutral

A delta-neutral position is one where the overall delta of an options portfolio is zero, meaning the position is not sensitive to small price changes in the underlying asset. In the context of the video, an Iron Condor is described as a delta-neutral strategy, which makes it relatively easy to execute and understand, as it involves balancing the position to be insensitive to minor price movements of the underlying stock.

💡Volatility on Volatility (VVIX)

The Volatility on Volatility Index (VVIX) is a measure of the volatility of the CBOE Volatility Index (VIX), itself a measure of market volatility. The script mentions Jacob Perlman coming on to discuss VVIX and the 'funky' numbers associated with it, indicating the complexity of understanding the volatility of volatility.

💡Trade Execution

Trade execution refers to the process of completing a securities trade. In the video, the term is used to describe the ease or difficulty of executing an Iron Condor strategy in a low IV environment. The script notes that while it's not more difficult to get a fill, it's harder to rationalize the execution due to the lower premium collected and the narrower profit zone.

💡Wings (Option Spread Width)

In the context of options trading, 'wings' refer to the difference in strike prices between the options in a spread. The video discusses selecting the appropriate wing width for an Iron Condor strategy in a low IV market, comparing 5, 10, and 20 wide wings to determine which performs better under different market conditions.

💡Days to Expiration (DTE)

Days to Expiration is the number of days until an option contract expires. The script mentions managing Iron Condors to 21 DTE, which is a strategy to close the position before the options expire, aiming to maximize profit or minimize loss.

💡Return on Capital

Return on Capital (ROC) is a measure of the profitability of an investment. In the video, ROC is discussed in relation to different wing widths of Iron Condors, noting that wider wings offer a higher ROC, which is an important factor for traders looking to maximize their gains.

💡Position Volatility

Position Volatility refers to the degree of variation in the value of an investment position. The script indicates that wider spreads have slightly lower position volatility, which can be beneficial for traders as it may lead to more predictable outcomes.

💡Bull Market

A bull market is characterized by rising prices and optimism among investors. The video discusses how Iron Condors perform in bull markets, noting that wider iron condors tend to do better due to the market's positive drift and smaller moves outside the range.

💡Bear Market

Conversely, a bear market is marked by falling prices and pessimism. The script reveals that during bear markets, smaller iron condors may perform better, as they can limit losses while still generating a decent return on capital, although the monthly volatility is higher.

Highlights

Introduction of a new research piece on trading iron condors in a low implied volatility (IV) environment.

The current market implied volatility is near its lowest point in recent history, significantly lower than the long-term average since the beginning of the COVID-19 pandemic.

Iron condor as a popular option strategy due to its delta neutral nature and ease of execution.

Challenges of executing iron condors in low IV environments, where less premium is collected and profit zones are narrower.

The iron condor strategy's suitability for high volatility markets and the impact of wing width on risk-reward balance.

Research indicating that wider wings are more effective in low volatility markets, providing a hybrid between a strangle and an iron condor.

Analysis of different wing widths (5, 10, and 20) in iron condors over 45 days to expiration and their management to 21 days to expiration (DTE) or 50% of max profit.

Implied volatility rank's insignificance on the probability of profit (POP) for iron condors, indicating market efficiency.

Higher return on capital and slightly lower position volatility with wider iron condors when implied volatility is higher.

Performance comparison of iron condors in bullish versus bearish market conditions, with wider iron condors performing better in bull markets.

Surprising finding that smaller iron condors may perform better in bear markets, despite higher monthly volatility.

The difficulty in predicting market conditions and the consequent challenge in choosing the right iron condor strategy.

Preference for wider iron condors for their reliability and consistent returns, regardless of market conditions.

Tactical approach to using wider iron condors in the current slightly bullish market with decreasing implied volatility for better returns and lower volatility.

Final takeaway emphasizing the reliability of wider iron condors for consistent returns and the potential of tighter iron condors in bear markets to limit losses.

Upcoming discussion on VIX and volatility on volatility with Jacob Perlman, exploring why numbers can appear 'funky' and the underlying math.