Tuesday, January 19, 2010

SPX Feb '10 Iron Condor

Today I am getting my feet wet with my first Iron condor. I have constructed the following Iron Condor: Sell -1 Feb '10 1190/1195 call spread and Sell -1 Feb '10 1100/1095 put spread @ -1.25. The most I can make on this trade is $125 on a risk of $375. This is about a 33% return on risk. I am playing with very small size because this is the first one that I have done like this.

With the choses strikes it gives the SPX a 90 point range that it can trade in between now and Feb '10 expiration. It is about +/- 45 points from its current price when the trade was initiated of 1145.

Looking at the risk profile and the probilities below. You will see that the option market is pricing in 100% chance that it finishes within the inside strikes of my Iron Condor which would yield the maximum profit (See Below).


  1. Did you play with this with SPX or SPY? I think you should leave it on no matter how it starts to run unless something substantial happens to change your outlook. With 100% probabilities you need a game changer to change your mind. Obviously if the expected value is 100% and you only need it to pay off 1/4 times, I like those odds.

    I still need to do some homework and find the empirical evidence of IV versus actual volatility. You can build that in to your models and this is the type of play you should be making in my opinion. Just keep playing the odds. The only way you lose in the long-run on these odds is if the odds change, i.e. the historical correlation of IV versus realized vol changes. That's very likely over the short-term, not likely over the long-term. That's why I think you should just stick with the trade. My only fear here is this is a five week expiration month, that's 25% longer than normal. Usually I sit out the first week since the time decay is so small over that time period.

  2. I actually made this one on the SPX, which are cash settled instead of stock like the VIX.

  3. Is it cash settled daily marked-to-market like futures, or only at expiration?