Can I Sell Iron Condor In A Low Implied Volatility Environment?
I know there are people out there who manage to make a consistent 20% return by just simply selling options on major indexes such as SPX and/or SPY continuously with the Iron Condor strategy.
One question I had was about Implied Volatility. Would such trades still work even in the low IV environment? Logically, it should, right? Otherwise, these people who are doing it wouldn’t be able to open such a large number of trades and generate consistent income.
What is the Iron Condor Options Trading Strategy?
In case you are not familiar with it, the Iron Condor is a popular options trading strategy that is designed to profit from a neutral market environment. It involves selling both a call and a put credit spread on the same underlying asset, with limited risk and potential for profit.
Let’s consider an example to understand how the Iron Condor strategy could work in a low implied volatility environment. Assume an investor sold an Iron Condor on SPX when it was trading at 3000. They might sell a 3100 call and buy a 3120 call to create a call credit spread, and then sell a 2900 put and buy a 2880 put to create a put credit spread, both expiring in 30 days.
The total premium collected might be around $200 for this Iron Condor. Even in a low IV environment, as long as SPX stays between 2900 and 3100 at expiration, the investor keeps the entire premium. Thus, even in a low volatility scenario, Iron Condors can still be profitable if the underlying asset price remains within the bounds of the sold strikes at expiry.
Why Concerned about Selling an Iron Condor in a Low Implied Volatility Environment?
The concern about selling Iron Condors in a low implied volatility (IV) environment stems from the nature of options pricing. In the world of options trading, IV is a key component. It represents the market’s expectations of future volatility, and it directly impacts the price of an option. When IV is low, it means that market expectations for volatility are relatively subdued. In this context, options premiums are generally lower.
The Iron Condor strategy, remember, involves selling options to collect a premium. In a low IV environment, the premiums collected from selling these options are likely to be smaller compared to a higher IV environment. This reduces the potential profit from an Iron Condor.
At the same time, the risk remains unchanged since the maximum possible loss is the difference between the strikes minus the premium received. As such, the risk-reward ratio may not be as favorable in a low IV environment.
Additionally, low IV environments could potentially indicate upcoming periods of high volatility. If the volatility increases sharply after establishing an Iron Condor, the position could quickly turn against the trader, leading to losses. There’s also the fact that adjustments, which are a critical part of Iron Condor management, could be more costly in a low IV environment.
So while it’s certainly possible to profit from Iron Condors in a low IV environment, such circumstances demand careful management and an understanding of the associated risks.
A Real-Life Example and a Couple of Studies on Trading Iron Condor in Low IV Environment
Below are three pieces of encouraging information to support the statement that selling Iron Condor in a low-volatility environment is indeed doable.
1) Cameron Skinner
I came across his story when listening to this podcast by Option Alpha, Cameron Skinner has managed to earn 22% annually by selling options every day.
He basically sells SPX contracts every day and closes SPX contracts every day based on the date of expiration. For example, he would sell 90 days to expiration Iron Condor SPX contract and close it down after 30 days.
2) A backtest study comparing Iron Condor to Strangle
I dug a little deeper and found a couple of videos. The first one is shown below was found on Youtube. The main focus of the video was to compare Iron Condor to Strangles, but the take-home message for me was that Implied Volatility did not matter that much when looking at a long time horizon.
This study included 2008 and 2009 data so there was a huge jump in volatility around that time. As a result, the test indicated that trades placed on lower IV performed better, which could be somewhat misleading since it was a black swan event. (NOTE: the study used VIX 17.5% as the cut-off. Higher than VIX 17.5% was considered high, and below that it was considered low).
However, the take-home message was that even including such a black swan event, selling Iron Condor works in both high and low-IV environments.
It is important to point out that the time to expiration for the options used in the study was 60 days.
3) A Tastytrade.com video
The other video I found was on Tastytrade.com and it talks about how to use Iron Condor in IRA accounts because of margin limitations in those types of accounts. The main focus of the video was to compare unmanaged trades (let it expire) or exiting at 50% of max profit.
The video indicates exiting early seems to yield a higher Profit and Loss number (PNL).
They also compared trading high IV Rank and low IV Rank. As it turned out, high IV Rank trades had better results in terms of PNL. It is important to note backtesting of these options trades was based on 45 days to expiration.
Conclusion
Based on these findings I would say selling Iron condor in a low IV environment works, at least with SPX. I am going to set up a real life trading experiment to see if this conclusion lives up to it.
My primary option trading strategies incorporate volatility and I am constantly experimenting with various trading strategies to improve my PNL.
I hold two Master’s degrees (MSc and MBA) with career experience as a cancer research scientist and a digital marketer.
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