SPX Strangle/Iron Condors Looking Interesting

Posted April 16th, 2012 by Mark Sebastian in Education

SPX Strangle/Iron Condors Looking Interesting

At the end of the day Friday, the market sold off pretty big. While some might lament that 'the bear is returning', I look at it a different way. With every move in volatility, a new opportunity presents itself. I do not think last week has been any different. While, yes the market has given away a whopping 4% (that was typed sarcastically) and the VIX rallied for a record 8 consecutive days (off of a 14 VIX I would add), I think this is a good thing for option traders.

Take a look at where the VIX had been over the last few weeks prior to last week:

Livevol (r) www.livevol.com

Not exactly a premium sellers dream. Now that we have had this recent rally, the VIX is now at its long term mean. This is a great spot to begin putting toes in the water on Iron condors. The great thing about the iron condor is that it sets a wide landing area. With increases in IV, traders can either collect more premiums or widen the landing area, depending how the traders approach. Typically, when the VIX gets to its mean, that means there is value in selling premium.

Why? Because traders should understand that the VIX has MANY more occurrences below 20 than above 20. It just turns out that once VIX breaks 25, it has a good chance to move over 40. That is what holds the VIX's mean higher. Looking at SPX:

Livevol (r) www.livevol.com

We can see that this has been a level its IV has been bouncing off of. This also sets up for a potentially favorable June iron condor. If traders play their cards right and VIX falls, it is entirely possible that a June spread could pull in 30-50% of its credit in under a week. For this trade not to work, one would need to believe that the market is going to go back below 1300 in a hurry and that the European crisis is about to blow up. While I think the EU will have to 'pay the piper' some day, that day is probably not now. The EU has the buying power to buy Italian and Spanish debt.

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Mark Sebastian is the Director of Eduction for Option Pit, and a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. He is co-host of "Option Block," the wildly popular show on The Options Insider Radio Network.

He has been published in nationally on Yahoo Finance, quoted in the Wall Street Journal is a featured contributor for TheStreet.com. He also writes regularly for SFO, and OptionsZone, and is the managing editor for Expiring Monthly: The Option Traders Journal.

To learn more about Option Pit and its mentoring services, please visit OptionPit.com

About Mark Sebastian

Mark Sebastian is a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. Along with his role directing the path of education for Option Pit, Mark is currently the director of risk for a private hedge fund. He writes a daily blog, the Option Pit blog, formerly Option911. Sebastian has been published nationally on Yahoo Finance, Google finance, Financial Times Alphaville and is a featured contributor for TheStreet.com. He is also published regularly at SFO, the Options Insider, and is one of the Co-Hosts of The Option Block Podcast, a featured Podcast from Options Insider Radio. Mark is the managing editor for Expiring Monthly: The Option Traders Journal. Sebastian has a Bachelor's in Science from Villanova University. To learn more about Option Pit and their mentoring services, please visit: http://www.optionpit.com

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