Condor Options

We mentioned yesterday evening in a note to subscribers that in the past, high volatility environments have been the best times to sell option spreads.  Rising volatility alone isn’t a sufficient signal – as anyone who was short volatility during the past few weeks can attest.  But once high-flying implied volatility readings turn the corner or flatten out, that’s often a good time to sell premium at those elevated levels.

From a directional perspective, there are signs that, two days after the “bottom,” this relief rally may already be getting overextended.  In our most recent study, “Historical and Implied Volatility Crossovers,” we found that instances of the 30-day historical volatility crossing over the near-month implied volatility have provided highly reliable short signals.  Since 2005, such signals in the S&P 500 had a 70% win rate, with a profit factor above 5.

We mention this because, as of yesterday’s close, that study generated a new short signal.  We are still cautious regarding historically-driven studies, as so much of the movement in this market is entirely news-driven and unpredictable.  But we wouldn’t be surprised to see markets digest the news of recent days and then give back some of this week’s gains.

Photo courtesy of Flickr user treehouse1977.