the XJO

The market can move in basically three directions: up, down, and sidewards.

Most traders can profit from Bullish movement, some even from bearish movement.

But when the market stagnates and doesn’t really go anywhere, what can you do?

The Iron Condor allows us to take a position that purely profits from sidewards movement. You can give yourself plenty of room for bullish or bearish movement, but the overall purpose is to see the market travel sidewards over a period of time.

The Iron Condor can also be used to take advantage of a drop in Implied
Volatility, a very important element to Options traders.

We can trade our speculation on the future direction of Implied Volatility like we could the price of the market or stock. The Iron Condor profits from a fall in Implied Volatility. Because it is neither concerned with minor movements in bullish or bearish movements, it helps partially remove that element from our speculation (if we want it to) and take a position that is trading the Implied Volatility of the Options.

A quick lesson – Implied Volatility:

Typically rises with falling markets and stocks and vice versa.

Makes up a portion of Options pricing.

Different strategies want to see Implied Volatility either rise or fall once entered.

So when would we use one?

In most circumstances we only trade Iron Condors when we think the market will trade between two key levels for a certain period. This means we aren’t really expecting too much bullish or bearish movement. We can typically manage some bullish or bearish movement, but its not a strategy we recommend when trends are strong. Therefore, they are more suitable in periods of consolidation.

In addition, Iron Condors can be used to take the view that Implied Volatility will fall without having to worry too much about bearish or bullish movement. Therefore, if this is our goal, we typically want to enter them when we have seen a rather large spike in Implied Volatility.

Its worth noting, it typically isn’t a good idea trading your view on Implied Volatility alone. You should marry it with your view of the underlying stock/market/asset.

A live example:

Today we placed an Iron Condor and suggested it to our clients. Our clients are often privy to our trade suggestions without any cost (except brokerage if they place them).

The market has sold off significantly over the past two days, arguably due to renewed fears of COVID-19’s threat to world economies. Despite the heavy falls seen this morning, U.S futures which sit firmly in the green today, have buoyed our market, helping it retrace at least 80 points from its lows.

The falls over the past two days have seen an equally significant spike in Implied Volatility for XJO (ASX200) Options. We think that the virus concerns will be short lived, especially considering the retracement we have seen in both our market and the U.S futures. Its worth noting that the falls we have seen due to the virus in the past have been relativly short lived.

If the market drifts in any direction over the next few days we should see volatility normalise. We can take advantage of this by entering the Iron Condor.

Because volatility has spiked to abnormal levels, we can get a strong premium for how wide the strikes on the trade are. If we see a fall in Implied Volatility, we will potentially have the opportunity to either close for a profit early, or instead, be in a healthy position to hold the trade and let time decay.

The levels we have chosen are wide enough to allow for plenty of market fluctuations with our sold legs at 7,225 (beyond the all time high of our market) and 6,650 (below several key support levels). Provided these levels aren’t breached over the next month or so, we will be in a great position to close, or perhaps even earlier if we see Implied Volatility fall back to normal levels.

The coloured in part of the chart is roughly the range we need to see the market trade in over the next few weeks if we decide to hold the trade. Otherwise, with the expected fall in Implied Volatility we will consider closing early.