Sometimes people tell us that trading iron condors is difficult. That’s just false. Trading an iron condor is just like buying a put or call, or buying or selling an equity, for that matter. Okay, it’s not just like those other things, but there’s a very important similarity: iron condors are “directional,” just like every other kind of trade in the universe.

Again: iron condors are directional, just like every other kind of trade in the universe.

“What?!” you say, exhibiting that annoying tendency you have to randomly drop consonants. “But I thought condors were always neutral, market neutral?” If you said that, you’d be right. They’re non-directional with regard to the price action of the underlying instrument. But price, as any good options trader knows, is by no means the only relevant variable. Of particular importance is this thing called “volatility,” and that, dear reader, is the variable about which any iron condor is always directionally inclined.

To be specific: the iron condor is always short volatility. That means that whenever we enter a position, we’re always betting that the volatility of the underlying will decrease or stay the same during the life of our trade. It also means that, unless we’re idiots, we’re going to try to avoid entering positions in low-volatility situations that are likely to soon become high-volatility situations. Cf. attached chart of the VIX year-to-date. Now, calling a VIX bottom is a fool’s errand, so we would certainly never sit on the sidelines while waiting for a pop that may never come. But we also won’t move full steam ahead as if nothing funny is going on. Attribute the low volatility to at least two things: 1) the Fed’s cheerleading style, heavy on the dollar confetti; 2) general complacency going into the traditionally strong year’s end. Neither of these factors is strong enough to override any genuinely bad news, and in any case the VIX can’t go down forever. So we’re keeping some powder dry for when the next easy target presents itself.

Last 5 posts by Condor Options

• Midweek Sméagol Reading - August 20th, 2008
• More on The Correlation Game - August 18th, 2008
• August Monthly Review - August 17th, 2008
• They Have the Passports to Prove It - August 13th, 2008
• Sleepy Nasdaq - August 12th, 2008