Wait for a Down Day?

Uncategorized Apr 10, 2019

By Steve Lentz

Some options trading educators have said to always “wait for a down day” before placing an index condor or butterfly position.  The theory goes that, by doing so, implied volatility will rise and then give the trader more of a credit and therefore more adjustment leeway and also more profits.  Let’s use Volatility Edge Analysis to test this idea.


Figure 1   SPX with marked Down Days and the VIX underneath

 If you look carefully at Figure 1, you will see that on most marked Down Days (close is lower then previous day’s close), the VIX did indeed rise.  This should come as no surprise to even an intermediate index options trader.  A down close brings more anxiety over the possibility of another down close and perhaps a bearish period which could get volatile very quickly.  The options market reflects this concern (fear) in the form of rising time premium across the board.

Figure 2    Volatility Edge Analysis if Lower Closes

From January 2000 to now, there have been 4833 SPX closes.  Of these, 2254 had closes lower than the previous close. 

Of the 4833 closes, 58% were favorable for selling options premium though condors or butterflies.  The market ended up moving less than what was being implied by the options prices.

Of the 2254 down closes, 56.3% were favorable for selling options premium.  This reflects a trading edge of -1.7%, thus debunking the notion that one should always “wait for a down day”.

Should you have other single variable ideas for me to test, please email me at [email protected]


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