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Trading Vertical Spreads as Unbalanced Condors

Over the last month and half, technical signals have proven to be false or extremely short lived.  So how do you trade the traditional, conservatively positioned vertical spread when the broad market indices are in a craze?

The first question you have to ask yourself is, “Does it makes sense to be trading these positions at all right now?”  The truth is, while the Option Workshop focuses on vertical spreads, the trade makes more sense in some environments than others.

But right now is in fact, a good time for verticals.  Since implied volatility is high (both in the at-the-money and out-of-the-money strikes), vertical spreads can generally be positioned at top dollar and/ or further away from price than normal.  On the other hand, volatility is high for a reason – price is moving around a lot.  A trade positioned well out-of-the-money today, may find itself at-the-money three days from now.

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The Vertical Spread Volatility Scalp

Let’s face it, trying to predict the direction of an equity in the last few months has not been easy.  Technical signals have proven to be false or extremely short lived.

But let’s talk about the benefits of this difficult market:  on most of the individual names (and the indexes) volatility is high both in the at-the-money and out-of-the-money strikes.  This provides the traditional, conservatively placed Vertical Spread an additional edge in that the option prices are higher than normal, allowing spreads to be positioned further away from the money than usual and in some cases, closer to expiration than normal.  If volatility does indeed drop (or more importantly if out-of-the-money volatility drops, aka: vertical skew flattens) – even if just for a few days, as it did in the middle and end of August – these trades can accrue decent profits without needing much movement in price or much time to pass.

So very simply put (keeping in mind that volatility reverts to the mean) there are opportunities out there that can be found by looking at implied volatility and skew charts.

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