Condor Options

Allocation in Abnormal Markets

As we said to the members this morning, when all your historical studies are broken or unhelpful and the market is behaving inexplicably, there’s really only one sensible way to think about capital allocation: Look at the positions in your account this morning.  If each one of those trades closed at its absolute worst possible price - its “maximum loss point” - would you lose a minute of sleep?  If the answer is yes, your trades are too large, and you…

Textbook Rally

In our weekend note to subscribers, we closed with the following thoughts: The market seems ready to test the October lows, and if this third time isn’t the charm, look out below.  Specifically, we’re watching 846 on SPX / 83.70 on SPY.  Remember that it’s common for sellers to push through any GTC stop loss orders before bowing out, so it’s entirely possible that we violate those recent lows briefly before turning back up. That’s precisely what has happened so far this…

Testing the VIX:VXV Ratio

This strategy buys the market when participants are overly fearful, and shorts the market when participants are overly complacent. In this study, we use the ratio of one-month to three-month volatility expectations to determine fearful and complacent market conditions. Bill Luby over at VIXandMore was the first to the notice and make use of the VIX:VXV ratio, which has now become a fairly popular indicator.  We haven’t seen much thorough testing of the ratio, and wondered how well it would perform as…

Calendars and Condors: Allocation and the Volatility Factor

We often refer to the complementary nature of iron condors and calendar spreads, in that the former benefit from falling implied volatility, while the latter generally get a boost from rising IV. So does that mean you should balance out volatility risk by allocating as much capital to calendars each month as you do to iron condors? Unfortunately, it isn’t that simple. First, it’s important to think about where implied volatility might be headed, especially when it’s at one extreme or…