Comments on: A Quiz: The Secret Directional Bias of Condors

By: Kam

Kam — Fri, 04 Apr 2008 06:23:22 +0000

The argument that iron condor’s have a slight bullish bias is sound. Effective portfolio risk management often calls for placing a calendar below or near the short put strikes on the condor in the event that there is a sudden spike in volatility. Because markets generally don’t crash to the upside, a calendar on the short call strikes is not necessary — a move to the upside could be offset by a decline in IV. In my practice, I generally look to place one calendar spread for a 5 lot condor and that suffices, but a discretionary decision can be made based on the greeks to place the calendar further OTM or further ATM depending on time to expiration and other situations.

By: Kevin Kolosky

Kevin Kolosky — Sat, 20 Oct 2007 02:29:57 +0000

I am going to add to my previous answer by saying that while I agree that all of these Greeks, volatility (both real and implied) and all of these other fancy measurements are very interesting, they don’t take the place of the thing I care about the most, and that is the price action of the underlying. If you want to call it delta, or theta, or vega, or green cheese, thats fine with me. All I really care about is that the price of that underlying ends up between my two short position strike prices in the Iron Condor. You can define it all you want, analyze is all you want, talk about it until your blue in the face. I just want the price to settle between the two short strikes and I am happy!!!!!

By: spf

spf — Fri, 19 Oct 2007 05:44:47 +0000

One simple rule. Vega is the highest near the current stock price. So volatility has the greatest effect in ATM options. As to why iron condors had negative vegas, thats bcos the sold calls/puts are always closer to ATM than the bought calls/puts.

I agree that vega had a slight effect but in my opinion, delta is still the killer here. Reason being, for 1 point rise in volatility, the sold option became pricer by vega but the delta will have already caused even much more damage to the sold position.

By: Yulius Dermawan

Yulius Dermawan — Fri, 19 Oct 2007 02:16:31 +0000

1. Volatility increase if there is a spike on price.other words go up and down dramatically.
2. Yes if the market trend was bullish.
3. Agree. In Bullish trend when the price go down quite big, time to make bull put spead
4. Neutral is the most profitable.Bullish may harm the position.
4.

By: Joe

Joe — Wed, 17 Oct 2007 16:45:31 +0000

First, about volatility:
-Real vol doesn’t matter as much as implied vol
-IV is driven by market sentiment, which is why “volatility” goes up when traders perceive high risk (generally when the market is going down).
-However, I’ve observed that the IV on calls may climb (as put volatility drops) if the market is driving higher, because of the higher demand for bullish positions.

Therefore, with an Iron Condor, being short vega can hurt you on the up side as well as the down side. Moreover, I’ve found that, especially near expiration, IV is skewed toward the lower-strike (short) call when the underlying is near or slightly in the money. I’m sure the corresponding conditions apply on the put side too, but the fear level during a correction outweighs bull-market greed, so I have the impression that volatility *skew* on puts isn’t as large (i.e., the lower-strike, long put trades at almost as high IV as the short put) when the market is correcting.

Another point, which I believe others have made, is that you get *some* benefit from the higher vol, because it pushes up your long positions (just not as much as the short ones).

Now for delta:
Even though, on paper, an Iron Condor is delta-neutral, the strategy is, in delta terms, bearish, because of the bullish bias of the market. The market tends, in the long run, to climb 0.6% to 0.7% per month, so if you position your condor “neutral”, you are actually net bearish.

On the other side, when the market does correct, the drops, especially serious ones, often happen very suddenly. So even though your average risk on the put spread is less, because of the market’s bullish bias, you can get burned suddenly, with little or no chance to get out, if there is a crash.

So, especially in a bull market, an Iron Condor, if centered around current price, is inherently bearish (trust me, I know–I’ve been burned on the call side far, far more often than on the puts); however, the downside risk in a strong correction or crash is substantial as well.

So, considering everything above, I’d say that, regardless of theoretical vega, the Iron Condor is slightly bearish–unless you adjust by skewing your strikes higher than center, but then you increase your downside risk if a correction happens, so I generally don’t do this. Which leads me to an entirely new thought:

Maybe the word “bearish” is misleading in this case, because if we set our short strikes at the outer edge of the market’s likely course, up or down, then we’re only slightly more bearish than the most fanatical bulls–and, slightly more bullish than the most fearful bears. So is that “neutral”?