Volatility Dashboard: Iron Condor Beta : S&P 500

VTS Community,

Making a small change to our Beta Dashboard

Today is only for those of you who care about our Volatility Dashboard metrics and how they are derived.  If you just follow the trades and don't pay attention to the dashboard then of course just skip today's blog.

Given that Iron Condors are a market neutral Option spread, I've always just shown them as "Delta" neutral in our Beta Dashboard and assigned a value of 0 to any open trades.  That does get close to a realistic estimate, but there are times when it won't fully represent the actual Beta exposure of that trade so there's no harm in getting a little more accurate with our values.

* Starting today, I will be giving them a Beta value based on where the current price is in relation to the middle of the trade range.

Before I highlight the change, let's define some terms:

Beta is a measure of how much one security / strategy / portfolio moves in relation to another.

So our Beta dashboard is a measure of how much our Portfolio moves in relation to the S&P 500.  It's a great way to get a general snapshot of how exposed we currently are to market movements.

- Beta : S&P 500 of +1 would mean that if the S&P 500 goes up 1%, we would expect our portfolio to go up 1%

- Beta : S&P 500 of -1 would mean that if the S&P 500 goes up 1%, we would expect our portfolio to go down 1%

Now these are not meant to be exact values over single days, it's more an expectation based on longer term averages, but the point is we can get an accurate representation of our market exposure at any given time.

Delta measures how much an Option value changes given a $1 change in the underlying security

- Positive Delta means if the underlying security goes up, we would expect our Option value to go up

- Negative Delta means if the underlying security goes up, we would expect our Option value to go down

The change I will be making is I'm going to assign a Delta value ranging from -0.30 to +0.30 to any open Iron Condors, based on an estimation of the equivalent Beta value compared to the S&P 500.  I think this is most easily explained by an example so here's our current trade. 

This is trade #1 that was opened a while back.

Now this trade is only down a little bit, but you can see the price has deviated from the middle and is pushing toward the right side.  This makes the trade Delta negative right now, meaning the Iron Condor would benefit from the underlying security going down.

I would represent this as a -0.30 Delta, and use that value inside the Beta dashboard.  Given that there's potential for as many as 3 trades, I'll use a smaller value of -0.30 to +0.30 for each trade.  You can see this estimation more clearly if I highlight the general range I would be using.

* This is only going to be an estimation, an "eyeballed" value so to speak

We can also do the same thing for our trade #2 which is also on the QQQ, but opened recently so the price hasn't deviated much from the middle yet.

Given that we've got one trade with a 0 Delta and another trade with a -0.30 Delta, it would be represented in the Beta : S&P 500 dashboard as -0.30 for the entire Iron Condor Strategy.

* I will also review our Beta values for the Volatility Trend Strategy when we have a new trade open in that strategy.

Beta : S&P 500 is an important risk metric

It's always good to have an accurate estimation for how much market exposure we have on at any given time. 

All in all, given that we are in our "safety" positions in all three tactical strategies, our current Beta : S&P 500 is 0.25

Remember, on average this would mean that if the S&P 500 goes up by 1%, we would expect our portfolio to go up by 0.25% and vice versa.  If the S&P 500 goes down by 1%, we would expect our portfolio to only go down -0.25%.  Basically, a muted response in both directions, which is what safety positions are there for.