And if the market sells off you will make money on the iron condor and lose on the VXX puts, so they help to hedge each other off. The VXX gets short VX futures, so it piles on your short implied volatility risk.
If the markets have a ripper of a rally, the gamma in the long VXX puts will help to soften the blow and allow you to adjust the trade on much better terms. Because the VXX runs with a negative correlation to stocks, getting net short VXX can give you upside hedging against the market. Here's the beauty of adding VXX puts to an iron condor: Instead of trying to hedge using extra options on the same asset. There's a few methods to consider- buying calls, call spreads, ratios, kite spreads, time spreads and so on.īut one simple idea has made my iron condor trading a lot more profitable. My Iron Condor Hack To Earn Higher Profits With Iron Condor Trading Well, I've discovered a little hack that you should consider when putting on a new iron condor trade. Any attempt to cut down on your net short exposure will either lead to your reward going down or your risk going up. There doesn't seem to be an easy way out. The rally doesn't see a pullback, and then the market rallies some more. Your bet that a market stays rangebound starts to sour. Since you already started off net short, you're going to be stuck at a natural disadvantage during bull markets. The max reward is 1.10, and the max risk is 3.90, which leaves us with a maximum return on risk of 28%. This is an iron condor with the short options at the equivalent delta- we do this to stay consistent across different asset classes. but what about if the market starts to grind higher? the decay of options over time, and that's where the real rewards come into play. In terms of greeks, your delta risk cuts into your vega rewards.
But most of the time, the only way for implied volatility to head lower is if the market rallies.Īnd since your iron condor is net short, the directional exposure cancels out any gains from the drop in implied volatility. Iron condors are short vega plays, which means that if the implied volatility goes down, you can make money. The Tradeoff We Can Never Seem To Get Around. Commodity options like gold and oil can have different volatility curves so this issue won't come up as often with those assets. Do note: this applies mainly to equity options.
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