Unit 3 · Level 2 · Iron condors & range trades
The volatility edge
Why would selling ranges make money at all? Because options are priced off IMPLIED volatility, and historically implied has tended to run somewhat above the volatility that actually unfolds. Buyers overpay for protection, like home insurance. That gap is the premium seller's edge. But it's an average, not a law: in February 2018 and March 2020 realized moves dwarfed what options had implied, and range sellers absorbed years of profits in days. It's picking up pennies in front of a steamroller. The steamroller is real.
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What you get asked
When does selling premium have genuine positive expectancy?
The edge is implied minus realized. High IV alone isn't enough. Before earnings, IV is high because the move really might be huge. Sellers need overpriced fear, not just priced fear.
Premium selling earns an edge when implied volatility runs above ___ volatility.
Realized (what actually happened) versus implied (what was priced). The spread between them (the volatility risk premium) is the entire economic case for range selling.
IV on a stock spikes to its highest level in a year. Why isn't that automatically a great condor entry?
IV was 'rich' on many stocks in early March 2020. Then realized vol went richer still. Fat premium is sometimes fair payment for a genuinely dangerous week.
Match the volatility situation to who has the edge
Neither side owns a permanent edge. The seller's advantage is a long-run average with brutal interruptions. Survival through the interruptions IS the strategy.
A condor seller boasts: '47 winning months out of 50.' What do you need to know before being impressed?
If each win made €500 and each loss took €12,000, the record is a net loss. Premium selling's win rate flatters it by design. Always weigh the tails. 🐜
The rest of this unit
Selling both tails at once: profiting from boredom, with the risk boxed in.