Condor Options has joined the Blog Action Day network, and on October 15, 2007 we will join over 1400 other blogs, reaching an estimated audience of over 1 million people, to write about an extremely important issue - the environment.

Our post will include some tips about ways that traders can reduce their environmental impact, and will feature an overview of some ways to invest in environmentally-friendly industries.

If you have a blog or website, why not consider getting involved?

Well, to be honest, we’re glad that’s over! We know, it’s kind of weird to post a monthly review when the month isn’t even over yet. But we’ve exited our August trades and expiration is now over, so we thought it might be worthwhile to review the individual trades we made this month and why they performed as they did.

The Market

The August options expiration cycle was one of the most volatile we’ve seen since the dot-com bubble era. We saw a legitimate full 10% correction followed by an expiration Friday in which all the major indexes rose over 1.8% in a single day. We saw the subprime mortgage meltdown finally show effects proportional to the real significance of the crisis. Helicopter Ben’s surprise discount rate cut may have solved the looming liquidity crunch, but it seems just as likely that the cut will have only provided temporary relief to a fundamentally troubled financial environment. Long or Short Capital gets it exactly right.

Our Trades

A quick remark about adjusting trades. As you know, we found it necessary to adjust all three of our positions this month. That’s not something we like to do as a matter of course. Hopefully you’ve seen our recent post about adjusting iron condors; we’ll certainly talk more about that topic in the future, but it’s worth pointing out again that our motto is “add, don’t adjust,” meaning that we’d always rather gradually add modestly-sized positions than try to tweak and fiddle with one monster all-or-nothing position.

August SPY iron condor #1

We opened this trade on July 13 at 149/151/158/160 for a credit of $1.03. We opened this trade only 24 days before August expiration, and it’s been a pretty strange ride since then. It’s rare to find such a spread with both a large range between short strikes and for such a nice credit, but of course when volatility spikes and the market makes a fundamental shift, even the most cushy position will likely require some adjustment or reevaluation. On July 26, we adjusted this trade downward so that our new strikes would be at 142/144/156/158, and the adjustment cost a net debit of $0.23. Some of you noticed that we made the adjustment using a butterfly on the call side and a condor on the put side: the names aren’t important, what’s important is that we executed the adjustment spreads all at once, just like when we enter and exit spreads, because legging into trades is always a recipe for undue risk. We closed the put side of this trade on August 10 for a debit of $0.75 and allowed our calls to expire worthless.

In any normal month, a $0.05 gain is nothing to write home about. In this cycle, not losing money is a huge accomplishment in itself. We spoke to a few young hedge fund guys yesterday who would give anything to have had a breakeven month.

August IWM iron condor

We opened this trade on July 23 at 78/80/86/88 for a credit of $0.80. Nice, even trade with a wide range and good credit. Our July 26 adjustment took the same approach as the SPY trade above - a call butterfly and put condor resulting in new strikes at 72/74/84/86. IWM showed some surprising relative strength in the recent correction, and we were able to exit on August 8th for a net gain of $0.36, or 23.6% on capital risked. Notice that we exited the entire position, including the call side. The reason we did that is because the calls were so far out of the money that it didn’t really cost anything extra to close them out, and by exiting the full position we didn’t leave portfolio margin tied up in those OTM contracts. We don’t have an IWM position open yet for September, and will be looking to enter one in the coming week.

August SPY iron condor #2

We made 19.4% profit on this trade in just 12 calendar days. Instead of panicking over our exiting positions, we added more inventory to take advantage of the increased volatility premium, and closed this 139/141/152/154 iron condor for a $0.26 credit.

Gold

First, what’s a scared investor to do? Both of these things are true:

1. Markets are verrry volatile, in both the generic sense (they jump around a lot) and the technical sense (they fall down a lot, hence high VIX). In times of turmoil, what happens? A “flight to quality,” of course! And what’s safer than gold? Hence, buy gold!
2. Grant the premise that investing tips from the tops of taxicabs are always contrary indicators. Hence, per this picture from midtown yesterday, don’t buy gold!

Membership

Oh, and the other thing: our prices are going up tomorrow. Reader of Condor Options Reports have known about this for awhile and have had a chance to act on it. Here’s your chance: if you sign yourself up on our waiting list before midnight tonight, whenever a spot becomes available for you, you will have an opportunity to subscribe at our current prices, which are:

After midnight tonight, rates will be

One more time, just so we’re clear. signup now, and you’ll lock in at the current rates. Wait until tomorrow, and you’ll be at the new rates.

Paul Kedrosky posts a quick and dirty summary and tag cloud of all the recent “apology” letters that busted quant hedge funds have sent to their investors. His MS Word auto-summary really caught our attention:

To that end, we’ve already seen increased client demand for our aggressive market-neutral equity fund. From speaking with our colleagues and large allocators in the market-neutral space, we understand that many market-neutral funds have suffered 5-to-15% losses so far in August.

Some thoughts:

1. As Paul says, there’s not much apology in these apologies. We’re not crying too hard for alpha-chasing hedge fund investors, but it’s still rude to send an apology letter that’s more marketing than it is mea culpa.
2. “Increased demand for market neutral funds” - oh really? Come join the party, and, uh, where have you been for the last six months? Oh, you thought that that rally was for real, and that Dow 14,000 actually meant something? How quant quaint. In any case, we’ve been calmly neutral before you hedge funds showed up, and we’ll still be calmly neutral long after you leave.
3. “5-to-15% losses so far in August” - sorry, what? The market’s only corrected 10% from top to bottom - meaning that you could’ve thrown all your cash in at the absolute Dow top, held on stubbornly all the way through today, and still done better than with whatever it is you’re calling a market-neutral strategy. Sounds like you hedgies might actually want to try hedging a position every once in awhile. We’re up 25% since June, and we’re certainly not geniuses.

We really don’t mean to be this abrasive, and we, unlike the unaccountable, unconscionable cadre of hedge fund managers, will actually apologize for our mistakes. But it’s just amazing how wealthy, lazy “accredited investors” will throw their money at anything that moves.

First, let’s tee up the VIX, because there was a point there today when it sure as heck seemed like the apocalypse was upon us: [note: these are all 15min charts]

Where I come from, a VIX with a 37 handle is nothing to joke about. On the one hand, it’s kind of paralyzing when none of your subjective models of options pricing apply, none of the market makers know what pricing models to apply either, and nobody wants to be the tragic hero sucking up all the bids. Around lunchtime, we did three things, all of which have worked out well so far:

1. Didn’t trade VIX options. Why? Because we’re not insane. Trading actual options on the VIX is like trading options on the reinsurers of the reinsurers of companies that sell insurance against hurricanes - you have no idea what you’re actually buying or selling, how that instrument will react in a crisis, etc. Question for any other options nerds out there: do the traditional Greeks function in any normal way with VIX options? Somehow I assume not.
2. Sold some put spreads around lunchtime, mostly on the better performers like RUT, IWM. It’s really criminal how the mainstream media (I’m looking at you, CNBC) pushes large caps every hour of every day but gives absolutely no love to small caps. Anyway, these spreads are obviously defined risk, yet still risky, and they have played out so far much, much better than they should. We’ll get to that in second.
3. For our members, we didn’t touch a darn thing. The easiest and fastest way to destroy any iron condor is to adjust the position every time the market sneezes. Sure, the “sneezes” we’re seeing this summer are louder and wetter than usual, if you’ll forgive the gross metaphor, but we can’t choose the direction or volatility of the markets, only whether or not we react in a disciplined way.

Moving on: check out these intraday bounces in the DJIA and the RUT:

The official word from Briefing.com is that short covering in the financials triggered the broad rally. I suppose that makes sense, given that the financials have certainly been showing us the way down in recent weeks. The real question, though, is whether a little bit of good news for Bear Stearns and Fannie Mae is enough to start turning the news cycle around. On the one hand, who knows whether a solid and sustained 10% drop is enough to work off the absurd abuse of liquidity that Greenspan allowed to develop (…probably not).  On the other hand, we’re certainly not hoping for a bear market.

Actually, we’re not hoping for anything in particular - that’s kind of the whole point of trading, ahem, market neutral.