Last week, as the market was falling apart and the VIX was exploding to multi-year highs, Cabot Options Trader Pro subscribers executed a short volatility trade, selling an Iron Condor. Here are the details of the trade and some of my commentary:
Iron Condor: Sell S&P 500 ETF (SPY) September 220/215 Bull Put Spreads and Sell 295/300 Bear Call Spreads
The VIX is spiking, and the markets are moving violently. When this will end is truly anyone’s guess. However, option volatility is getting to good levels to sell.
Because of elevated volatility, I am going to sell an Iron Condor, which is a short volatility trade. This position will make money if the SPY doesn’t fall by 17% or rise by 11%.
To execute this trade, you need to:
Sell to Open September 220 Puts, and
Buy to Open September 215 Puts, and
Sell to Open September 295 Calls, and
Buy to Open September 300 Calls.
Essentially, you have a bull put spread and a bear call spread.
The ideal spot for the trade is the SPY trading between 220 and 295 on September expiration.
It’s unlikely that we’ll hold the position until it expires. It’s a volatility scalping trade that, if it goes well, we will buy back for an approximate 15% profit in the next month or two.
As I said in the trade alert, I likely won’t hold the position until September. Instead, my plan was to essentially sell the VIX when it was above 40, and buy it back when it trades in the 15-20 range.
Yesterday, both Cabot Options Trader and Cabot Options Trader Pro executed a buy-write, which is another short volatility trade, because I felt that the market’s recent wild swings were potentially slowing down.
While there are certainly risks in both trades, when the price is right, selling volatility/insurance can be a solid strategy.
Below I show my matrix of trading strategies. They are broken into four categories: Bullish, Bearish, Short Volatility and Long Volatility.
