Option sellers such as those that trade the weekly SPX Iron Condor love volatility for the higher premiums it brings, but how much is TOO much?
The last week and into early this week we have seen some record market moves across the board, including the "fear" index VIX. Last week the VIX had the largest ever weekly jump of 118%. Monday the records continued when the VIX reached the highest level in almost seven years, or 45% in just 2 days. This was another milestone, the first time in history.
The five year chart of the VIX as shown below puts the above figures in perspective.
VIX 5 year chart:
The fear over China's stock market plunge has caused all the major indices to break below major levels of support. Yesterday the attempted rally failed towards the close, and the index sold off to end in the red. Today, as of this writing, SPX is +36 points with 2 hours left to the trading day, so perhaps this rally will hold.
SPX 6 month chart
My fear is that I personally don't think these major moves, hence the volatility, will settle down any time soon. What we are seeing is the indecision by both buyers and sellers, with no clear picture in sight.
Many years ago I studied with a very successful options trader, who based his trade plan and actions on the level of the VIX. His recommendation to me at the time was the if the VIX is at any level near 30 - slightly below or anything above, he feels it is best to sit on the sidelines.
Option premium sellers such as ourselves love the juicy premiums this volatility level brings. On the other side of that coin, however, lurks the reality that higher volatility brings the risk of continued major market moves that could knock us out of a position, especially one of a shorter-term nature such as the SPX weekly Iron Condor.
Today the VIX is currently trading at 32.75, so has come down from yesterday. However, I don't trust the market from one day to the next, given the recent moves.
I felt it important to share my thoughts with you regarding a new trade entry on Friday for the SPX weekly Iron Condor. It's really anyone's guess as to what the VIX will be on Friday, and the overall market, at this point. But I do know one thing is certain; unless the VIX drops significantly below 30 I do not feel comfortable recommending a new trade entry for the weekly Iron Condor. Those more adventurous than I may choose to do so on their own, but I would rather not risk my hard earned cash at these lofty levels.
I will post an update on Friday.
As always, stay keen on your risk management and trade carefully,