VIX at 30 Is Exactly When Premium Sellers Get Rewarded. Here's the Proof.

SPX

The speaker executed an iron condor on the SPX with strikes 6885, 6910, 6975, and 7000, collecting $295 in credit. By simulating an increase in volatility (from VIX 1550 to 2550), the value of the iron condor increased to $766, demonstrating the significant impact of volatility on zero DTE SPX options. This trade idea suggests that traders should consider the potential for volatility increases when selecting strike prices and managing risk in zero DTE options.

SPX

When volatility is high, premium sellers, such as those using iron condors or strangles, are rewarded. Higher volatility allows for larger premiums, which can be captured by adjusting strike prices further out of the money. However, traders should not stop trading when volatility is high; instead, they should consider reducing size or tightening strike ranges. The speaker emphasizes that defined risk trades should be used, and traders should not avoid trading when volatility is high, as it presents opportunities for profit.

Impact of Volatility on Zero DTE SPX Options

The value of zero DTE SPX options is sensitive to changes in implied volatility (IV), even though they are short-term. An example showed that raising IV by 10 points (from 1550 to 2550) increased the value of an iron condor from $295 to $766, demonstrating a non-linear impact of volatility on option prices. This sensitivity is less pronounced compared to options with longer expiration dates, which have more vega and are more sensitive to IV changes.

Volatility Impact on Option Prices

The change in volatility has a non-linear impact on option prices. Higher volatility leads to larger changes in option prices. This is due to the fact that volatility directly affects the premium of options, with higher volatility increasing the premium more significantly. This principle is applicable when volatility is high, as it creates more opportunities for premium sellers.

Why did the speaker sell the iron condor on the SPX?

The speaker sold the iron condor to collect a credit by selling options with a specific strike range (25 points apart) and buying options further out. The trade was based on the expectation that the underlying SPX would remain within the strike range, allowing the trader to collect the premium.

TakeawayTraders can use iron condors to collect premiums by selling options with a specific strike range and buying options further out, provided the underlying asset remains within the strike range.

What happens to option prices when volatility increases?

When volatility increases, the impact on option prices is non-linear. Higher volatility leads to larger changes in option prices, which can be beneficial for premium sellers.

TakeawayHigher volatility increases the premium of options, creating opportunities for premium sellers.