Test 8: IV

This week we are going to look at the implications that implied volatility has on iron condor trades. Can the implied volatility be a good indicator on when or where to enter a trade?

To start with, lets look at the implied volatility of the ATM options for the RUT for the first three month expirations over the last 9 years:


The front month is definitely more volatile as we would expect, but the 2nd and 3rd months look to track one another closely. We can see that the minimum is around 15 and the max is in the neighborhood of 70. Note that I am calculating the implied volatility of the option chain as a weighted-average of the ATM option’s IVs.

These tests will using the following IV thresholds:

0.10, 0.125, 0.15, 0.175, 0.20, 0.225, 0.25, 0.30, 0.40, 0.5, 0.6, 0.7

Note as the graph shows, we should not expect any trades with an IV under 0.10. Using this value serves as a sanity check on the results.

IVs Greater than Threshold

The first test run uses the IV as a minimum threshold to entering a trade. For examples, trades with a minimum IV of 25 would not likely enter a trade when this article was written (IV is around 16).


The Top row are the IVs.

The first thing to note is that trades requiring an IV above 30 are very hard to come by.  Trades over 30 occurred less than 14 times in the last 10 years. The data show above for these high vol trades are interesting but cannot be counted on due to the very low population size. But it is interesting to note that there may be an advantage for low delta trades has extremely high IVs over high delta trades.

In general I would say that there is marginal effect when using IV as the sole entry criteria until the IV starts getting north of 22.5. Between an IV of 22.5 and 30 there is a significant sample size and the IV threshold, especially at lower deltas, seems to benefit the trade.


Expected Returns over Minimum IV

Looking at a graph of the expected returns based on using a minimum IV threshold we can see a couple patterns. First, for the extremely high IV trades (which are very rare), the low delta Front Month trades perform very well, as do all the deltas in the 3rd month. But again, this is based on a very small sample size.

Second, many traders often note that condor trades when the IV is under ‘X’ are not worthwhile. As I write this, the VIX and RVX are at extreme lows, and this comment is a frequently shared sentiment. But according to this data, it doesn’t really stand up. The low IV trades do well. But we have to wait for a few more tests to be sure their effect is due to the low IV trades and not being propped up by other high-IV trades.

IVs Less Than Threshold

Now lets look at the reverse situation  What if we place an upper threshold on the entry IV of a trade.


Improvement in Profit Factor by maximum IV levels (IV in columns)

Now we can see that the very low IV trades were much harder to come by except for the Front Month. Setting a maximum IV threshold may be a detriment to high delta Front Month trades, but largely the effect is marginal. The Front Month, low IV trades (i.e under 18) appear to perform better than the baseline which provides evidence that there may be good IC trades in low volatility environments.

Most of the trades in the second month have marginal effect. But the Third month appears to have non-marginal improvements in trades with IV less than 20.

IV Between Thresholds

Now we can look at combine a lower and upper threshold and see if any patterns emerge.

Improvement in Profit Factor between Bounded IV ranges

Improvement in Profit Factor between Bounded IV ranges

If you were to only trade within a specific range, lower IV environments would actually give you a boost. There are also some good scenarios in the Front Month with IVs between 25 and 50. If you only want to trade in the very high IV ranges, you will be waiting a long time to initiate a trade, but you are also best advised to use the Back Month trades. From this table we can see the largest improvements are:

  • IV between 13 and 18: Lower Delta in any Month.
  • IV between 18 and 20: Very Low delta front month trades, or lower delta trades in third month.
  • IV between 20 and 30: There is no clear winner. Most trades look marginally impacted.
  • IV between 30 and 50: Low Delta Front Month
  • IV over 50:  Third Month trades

So… can we use this to help pick better positions.

Expected Return with bounded IV ranges.

Expected Return with bounded IV ranges.

Above is a heatmap of the expected returns of all the trades with bounded implied volatilities. Those trades with very low number of trades are circled in red. Each column is colored according the the best and worst performers for that IV range.

Note the trend in the back months: high delta trades perform worse and worse as the IV range is increased, barring extreme levels.

Today, the IVs of the RUT are 15.3, 16.6 and 17.9 as of this writing. They all fall squarely in the second column. According to this data, it may be most advantageous to enter a Front-Month trade with Deltas between 15 and 22, or a back month trade with deltas below 22.

To me, this sort of dispels the belief that there are not good returns in low volatility environments. In fact according to this data, the front month trades in the 13 to 20 delta range out performed those in 20 to 25. Quite the opposite of what I understand many to believe. BUT, these trades are all held to expiration, and that is generally not practiced…


Low IV environments may not be as bad as many seem to claim. In fact the Mid-IV range has historically shown to perform slightly worse. But in either case, IV can be a very useful tool in selecting which month and which strikes to enter.

Believe it or not, this test took me quite a while. I thought it was going to be trivial to implement, but I kept finding interesting nuggets to investigate (as well as a lot of refactoring to my codebase). But the effort is worth it and I can’t wait to test these concepts across a broader base of instruments.

Test Files:

Minimum IV Data Results

Maximum IV Data Results

Bounded IV Data Results

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