Our VTS Iron Condor strategy suffered it’s first losing month since June 2016 last month.  Disappointing to be sure, but it does mean we’re in cash now and I’ve had several questions about why we aren’t already in a new trade?  The short answer is not that different from why we’re not in volatility products either, and that is volatility is way too low and it makes it far too risky.

First let’s take a look at our last three losing months for that strategy.  There’s only been three in the last two years, and all three for different reasons.  Here they are marked on a 2 year chart of the Russell 2000  (RUT)



January 2016:  You can see the first trade there on the left lost money because we got caught in a pretty steep market decline.  That happens of course.  I don’t control the markets or try to time them.  We just set up good trades, and sometimes markets move too far too fast and force a stop out.


June 2016:  The month of the Brexit vote, but the loss was not caused by that.  I don’t anticipate or front run markets.  But when a truly binary event like that one is on the horizon, especially when the potential outcome is so asymmetric, it’s always best to be in cash so the trade was closed a few days before for a small loss.  Better to be safe than sorry, and my policy turned out to be correct because that Brexit day saw one of the largest VIX spikes in history.

Side note, we also moved to cash in our VTS Tactical Volatility Strategy and dodged that -26.78% XIV crash bullet as well.


September 2017:  That third losing trade on the far right from last month is for the exact opposite reason to the first trade.  We got caught in a huge run up in the RUT.  It was up 6.5% in a very short period of time.  I set up my trades to be as safe as possible with extremely wide wings and several months to expiry, but even then we just can’t sustain a 6.5% run up during the life of our trade so again we were forced to stop out.


So the question is, when is the ideal time to get back into a trade?


Well remember, Iron Condors perform better in higher volatility environments.  They are what’s called Vega negative trades which means that if volatility rises they tend to lose money, and if volatility falls they tend to make money.  If volatility is already in the basement like it is now, it doesn’t have any further to fall but it sure has a lot of sky above it to rise.  This is a very risky time to be entering new trades.


For the first two losing trades from the chart above, in both cases we were able to get back into a brand new iron condor trade almost immediately after the loss.  The trades were stopped out because volatility was rising, meaning the next trade we open is even better than the previous one.  We like higher volatility.


Not the case last month.  We got stopped out because of the index screaming higher.  Opening a trade now with volatility on the Russell 2000 near it’s 10 year lows wouldn’t provide enough insurance and protection against a market decline.  The wings of the trade would be way too narrow and the margin for error too small.


Recall from last week, there are VIX style indexes for many products including the Russell 2000.  It’s called the RVX and here’s a 5 year chart of the VIX for the RUT:



A short iron condor at these low levels of volatility would be suicide.  If anything, iron condor traders could perhaps look to be buying a long iron condor that’s Vega positive and profits from increasing volatility.


Our VTS Iron Condor Strategy doesn’t take long trades, but perhaps as a bonus teaching tool in the next few days I can outline what that would look like for everyone, just if you’re curious.


Current VTS Total Portfolio Solution Allocations

25% VTS Tactical Volatility Strategy

50% VTS Tactical Balanced Strategy

25% VTS Iron Condor Strategy

VTS Conservative Vol Strategy  –  Optional replacement for lower risk tolerance investors


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