Trading was light today ahead of the government employment report due out tomorrow. Overall, the recent rally seems to have stalled a bit, and the volume on some of the major indexes has been light enough that there is reason to look for a developing move back down. Recall that it was the Labor Department’s report back in August that served as the catalyst for a 250 point drop in the Dow.

A major positive surprise on the jobs report might pose some risk to our positions, although given the lackluster data out today we don’t expect anything too magnificent. Speaking of our positions, let’s look at them: [full data is available to members at the Portfolio page]

IWM October iron condor #1 - we entered this position back on September 25, and it has given our more skittish members some minor ulcers! The small-cap rebound combined with the slight lift in volatility have left us currently a bit underwater on this trade. We still have a small buffer on the call side of the trade, and are looking for a modest pullback in IWM (see analysis below).

SPY October iron condor - this position is only a few days old, and is looking great. We could fall all the way to late-August/early-September levels (i.e. pre-Fed rate cut levels) of support and still be okay; alternatively, we could endure a continuation of the rally. The mark value of this position is within about a penny of where we sold it.

IWM October iron condor #2 - we entered this trade a few days ago as well to take advantage of the new index position. Per the midprice after today’s close, this position has already earned us a quick 15%! This trade also helps smooth out the aggregate risk curve of our portfolio, and in this particular circumstance we’ve taken on a bit less reward (and therefore more risk) than we usually look for in order to increase the probability of a successful trade. We also may hold this position through expiration if circumstances warrant it.

Since IWM is such a big part of our strategy this month, we’d thought we’d quickly mention the case for a modest pullback. First, we should mention that the success of our positions does not depend on any significant downturn - that’s kind of the whole point of the iron condor strategy, and we couldn’t honestly claim to be market-neutral if our trades constantly relied on directional predictions. That said, the case for a modest short-term pullback is that: 1) the index has been rising recently on declining volume, which is never a circumstance that inspires confidence; 2) the 2-day Relative Strength Index, while not screaming, still registers an overbought reading above 75; 3) unlike its friends Mr. S&P500 and Ms. DJIA, baby Russell still hasn’t come close to taking out its July highs - in other words, RUT/IWM still looks to be the weakling of the bunch.

As always, we’re keeping a close eye on our positions and will issue any alerts to members as needed. If you’re not yet a member, the waiting list is a little bit shorter these days.

Here are some books we recommend.  If we had to choose just one, it would probably be Option Volatility & Pricing by Natenberg. We plan to post full-length reviews of some of them in the near future:

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.

“Wha?!” 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.

Or, to answer the question posed in the title: Yes.