Defined-risk volatility premium
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The volatility risk premium is the gap between the volatility implied by option prices and the volatility that is later realized. Selling options is a bet that implied volatility is rich. An iron condor makes that bet with a capped loss: a short put spread and a short call spread, entered for a net credit, that profits if the underlying stays between the short strikes.
Not investment advice. Nothing here is a recommendation to buy or sell anything. Backtests and historical studies are not guarantees, and a rule that worked in one sample can fail in the next. Trading can lose money. Links are for education, not endorsements. Do your own research.
- Rules
- A defined-risk version sells an out-of-the-money put spread and an out-of-the-money call spread in the same expiration, sized so the maximum loss, the width of the wider spread minus the credit, is an amount chosen in advance. Entries are often 30 to 45 days to expiration, closed at a fraction of the credit or at a loss limit, and skipped when implied volatility is already crushed or a known event is inside the window. Undefined-risk short straddles are a different strategy and can lose more than the credit.
- Where AI fits
- AI can rank days by the gap between implied and recent realized volatility and refuse trades when that gap is gone or when a trend filter says a quiet range is unlikely. It can also enforce the max-loss size, which is the part discretionary sellers drop after a few winners. An LLM can explain the Greeks of a specific condor. It should not be allowed to widen strikes after the trade is on.
- Markets
- Index options such as SPX, where the contract is cash-settled and the underlying is diversified. Single-name condors add earnings gaps.
- Timeframes
- Days to a few weeks. Same-day expiration multiplies gamma and is a different risk.
- Risks
- The typical win is smaller than the typical loss. One volatility spike can wipe out many credits, and defined risk still means you can lose the full spread width. Fills, early assignment on American options, and pin risk at expiration are easy to leave out of a backtest. This is not an income product.