As you probably already know, the reason we focus on iron condors is that they are a non-directional options strategy, which means we don’t have to be right about whether the market will go up or down in a given month in order to make money.

Nevertheless, it’s interesting and worthwhile to pay attention to market action, especially when it comes to possible turning points in market sentiment and trends. We’re at just such a potential turning point this week. If the churning action of the last few trading days continues, we may see the end of the roaring trend that has followed the major correction in late February.

This chart provides a couple of interesting signals:

• The SPX has been riding a major trendline since its recent bottom on March 14. That trendline seems to have been violated, and the price action of the next few days should prove important for suggesting whether markets will resume their recent bullishness, or transition to some other prevailing sentiment.
• Volume has been increasing on down days, and decreasing during rallies. The On Balance Volume reading has stalled, and if a downturn develops there that will be a bearish signal.
• The ADX indicator is extremely near a signal that we may be leaving a trending market and entering a range-bound market. The interesting thing about the ADX indicator, if you’re not familiar with it, is that it doesn’t signal bearish or bullish trends, but rather measures the likelihood of trending vs. non-trending markets.

Along with the other signals and charting methods we use to determine entry points for trades, these data points suggest that a change in market sentiment may be upon us. As said above, the action this week should be telling.

Impact

A sentiment change, especially if it is a change toward a range-bound rather than trending market, could be very advantageous for us. It is much easier to trade iron condors during range-bound markets, since there is a decreased chance of seeing your short calls/puts violated and having to exit the trade early or even take a loss. Although we will take whatever opportunities the markets give us, including a resumed bullish trend, some moderation in market sentiment will make our trades even more successful.

We will be entering new trades as market action dictates, although of course these are strictly for our members.

We have left registration open, as there are still a couple spots left for new members. But if you’re considering subscribing, you should hurry: once those last few spots are filled, we will close registration and not accept any new subscribers.

Just a note to our non-member readers: our June iron condor trade has been posted and sent to our subscribers. There are still a few open spots left if you’re considering joining.

The futures are pointing to a lower open this morning, and our members will receive any necessary updates in real time.

The old folk wisdom about market cycles says to “sell in May and go away” until October or so. Well, we’ve unintentionally followed that advice so far this month, as we don’t have any open iron condor positions - the rally that started last month spooked us, and we’re sure glad to have stayed out so far!

But the Fed meeting on Wednesday might provide a key catalyst. Although the indices look short-term overbought, with sentiment-driven rallies like this, it might take longer than normal for reality to kick back in. In any case, we’ll be looking at the action on Wednesday to determine whether to enter a new position.

Our members, of course, will receive immediate notice of any trades we initiate.

The key to a truly market-neutral trading strategy is to keep your positions delta-neutral. If you’re not familiar with “the Greeks”, that’s okay:

Delta measures the sensitivity of an option’s theoretical value to a change in the price of the underlying asset. It is represented as a number between minus one and one, and it indicates how much the value of an option should change when the price of the underlying stock rises by one dollar.

Remember, the idea behind the iron condor is to position ourselves so that we make money no matter which direction the market moves. Well, sometimes the market moves a long way in one direction, threatening to violate the outer bounds of our position. In those kinds of situations, the side of the trade that is close to being violated will move in price much more dramatically than will the other side of the trade. The reason one side of a trade sometimes changes in price more dramatically than the other side is that the delta of the fast-moving side is higher. So to keep our trade truly market-neutral, we have to keep it delta-neutral. An example will show you what we mean.

Examine this hypothetical trade: with SPY at 144 and 4+ weeks until expiration, let’s say we put on the following trade. The prices and credit received don’t really matter for this example.

+1 SPY 148 call
-1 SPY 146 call
-1 SPY 142 put
+1 SPY 140 put

In the first several days of the life of this trade, any move in the underlying should be pretty evenly reflected in the two sides of the trade. So if the index moves down to 143.70 a few days after we opened the trade, our puts should increase in value by nearly the same amount that our calls decrease in value. And with a lot of time until expiration, that price movement shouldn’t be very large.

But what happens if the market makes a big, sustained move in one direction? Simply put, the delta of the wrong side of our trade will get crushed (i.e., will move closer to 0.0), while the delta of the right side of the other side will move closer to 0.5. The more the deltas of the two sides diverge, the more their price action will diverge as well. In our example, let’s say the SPY falls all the way down to 142.40, and hovers in that area for several days. Let’s say there are now only 2 weeks until expiration. What would happen is that our 146/148 calls will have become worth very little, while the value of the 140/142 puts will have jumped significantly. But here’s how unbalanced delta can really hurt: as the index price moves down, the calls lose value at a slower rate than the puts gain value. So if SPY falls further to 141.80 - beyond the strike of our short put, we’ll lose more money on the put side than we’ll gain on the call side. And the longer we keep a position that is significantly outside the market price (i.e. as long as the price is beyond the range of our spread), the less likely even a favorable reversal will help us catch up.

Luckily, if the index price starts to threaten our position, we don’t have to just sit idly by. Although our Trading Rules tell us not to exit early, and while we’re very wary of “overtrading” or overthinking a position, there are a few things we can do to adjust the trade to take advantage of big market movements.