Question

After the investor enter the option market, if the market volatility increases considerably, what will happen to the value of a long iron condor option portfolio relative to what it was initially? Please explain.

Answer 1

Long iron condor option portfolio is created by combining the bear put spread and bull call spread i.e. by taking long and short position in call at a higher strike price, and long and short postion in put at a lower strike price, such that strike price of long put option < Strike price of long call option. With rise in volatility the premiuim of option increase. So the long option will increase the portfolio value, whereas short position in call and put option decrease value of portfolio (because we sold them). However since the short option are further away( i.e out of money) their impact will be less than positive impact of long position in options.

Thus value of a long iron condor option portfolio increases, if volatility increases