Condor Options

We’re probably not the only ones who thought yesterday’s big rally was strange. Oil was up and so were airline stocks? Bond yields were down but the dollar was up? More people are pinching pennies by shopping at Wal-Mart and Costco instead of Kohl’s and The Gap, and investors pile into retail?

It didn’t make sense to us, either, but the market can behave irrationally long enough to do serious damage to our portfolio if we don’t maintain our discipline with respect to applying the rules of our strategy. Yesterday, those rules told us our RTH Calendar Options position had entered risky territory. If we had let our emotions get in the way and gambled on the fact that all the buying didn’t make sense, the trade might have been too far gone to be salvaged if the rally had continued this morning. But as it turned out, that wasn’t the case.

A number of readers have written to ask whether, now that RTH has pulled back, would we still make yesterday’s adjustment this morning. We make our decisions by applying our adjustment rules to where a position stands at the time—so no, if we hadn’t adjusted yesterday, we’d let the triple-calendar ride for the time being. Nevertheless, the adjusted position is still in pretty good shape too, and there’s no reason to make any change there right now either. (And because we did make the adjustment, future posts, and our performance record, will be based on the adjusted trade.)