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ORB or Iron Condor?

The Opening Range Breakout (ORB) is a good strategy when there is ample volatility and trend conditions. However, there are days when trading a breakout strategy is less than ideal due to a lack of volatility and trending conditions. When the market is undergoing consolidation, mean reversion price action and lower volatility tend to be the norm. Focusing on a more market-neutral strategy like the Iron Condor in these environments may be a better approach.

We analyzed 227 trading days, from April 19th 2023 to March 12th 2024, focusing on the 1-Day implied move, to determine whether the ORB or the Iron Condor has a greater edge. 

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Our assumption was that on lower Implied Volatility (IV) days, the Iron Condor would have an edge over the ORB. Generally, lower IV results in less realized volatility, while higher IV tends to lead to higher realized volatility. We have determined that a 1-Day implied move of 0.70 or less generally makes an Iron Condor the more attractive strategy.

Out of the 227 trading days we analyzed, 69 of them (30%) had a 1-Day implied move of 0.7% or less. Focusing on those 69 days, 55 (79%) of them had a trading range of less than 40 points, making Iron Condors an easy trade. However, 14 of them had a trading range that may have threatened the integrity of an Iron Condor. We delved deeper into those 14 days to identify any commonalities or patterns that might help us avoid trading Iron Condors on such days - the major variable being the SPX's position relative to the Flip. On 9 of the 14 days where the 1-Day implied move was 0.7% or less, the SPX was trading below the Flip.

This was not a surprise to us because when trading below the Flip (negative gamma), flows are destabilizing, and we tend to see more directional price action and higher volatility. Whereas, when trading above the Flip (positive gamma), flows are supportive, and we tend to see more mean reversion, lower volatility price action. In our analysis, the SPX was only trading below the Flip 16% of the days, making it a very small sample size.

Sector Rotation

A relatively reliable indication of a lower volatility, mean reversion-type sessions occurs when we observe sector rotation, simply meaning some sectors are green while others are red.

Such rotation signals a lack of a strong overall market trend. In this environment, market-neutral strategies tend to outperform. If we observe low implied volatility accompanied by sector rotation or mixed market internals, it serves as a supportive factor for selling an Iron Condor. 

Key Takeaways
  • If the 1-Day implied move is 0.7% or less and trading above the Flip, an Iron Condor is more likely to outperform.

  • If the 1-Day implied move is greater than 0.7%, prioritize the ORB over a market-neutral strategy.

  • Avoid trading Iron Condors below the Flip (negative gamma), regardless of the 1-Day implied move.

  • Utilize sector performance and market internals to support decision-making. 

As we all know, trading is more of an art than a science, so these aren't hard rules but rather variables we can consider when selecting strategies.

Quantitative by Matthew

Qualitative by Conner


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