Condor Options

We began putting more emphasis on a portfolio-level view of risk-management in the July cycle, entering multiple trades on a single underlying and looking at the overall position, as well as each individual trade, in deciding when and how to make adjustments. Our return for the month wasn’t stellar, but considering the fact that the market traced out an 8% correction before recovering abruptly in expiration week, we think our 3% average return per trade showed that the strategy worked well. (When we closed our positions, the S&P was still down almost 5%.)

Performance Comparison

• S&P 500: +2.08%
• Dow Jones Industrials: +2.39%
• Russell 2000: +1.27%
• S&P 500 Covered Call Fund: +1.58%
• Calendar Options: 1.11%
• Note: the period measured is from expiration to expiration.

We calculate Calendar Options returns based on a model portfolio allocation. We initially size each hypothetical position at 25% of the total portfolio value at the beginning of the cycle; with a maximum of three trades per month, this leaves at least 25% initially in cash for adjustments, if needed. Note that the model portfolio is not intended as a recommended allocation or as investment advice.

To see how the performance of our model portfolio since inception compares to a portfolio that’s 100% long the S&P 500, take a look at our Performance page. All performance figures include slippage (calculations are based on the actual prices at which the participating autotrading brokers were filled), but exclude any other transaction costs.

July Trades

• SPY July/August 94 Calendar Spread: –12.99% return – We entered this trade as the S&P 500 Index was consolidating right below resistance around 950. A risk- management adjustment was triggered less than two weeks later, when the S&P dropped more than 3% to end the day below 900. With our second trade already in place at the 90 strike, we were able to give ourselves plenty of room to the downside, knowing that the other spread would more than make up for any loss we might take if SPY ended the month in the sagging center of the adjusted risk curve. In hindsight, we might have narrowed the loss on this trade if we had stayed in a little longer—but with implied volatility dropping like a rock the Monday before expiration, taking risk off the table seemed like the prudent thing to do.
• SPY July/August 90 Calendar Spread: 19.05% return – This position was our money-maker, despite having been opened with the VIX near the upper end of its range for the month (little did we know at the time, implied volatility would go on to repeatedly hit new post-credit-crisis lows). Otherwise, it was a nice example of why we trade calendar spreads—i.e., the potential for a 20% return in only about three weeks.

We’ve already locked in a 27% return on one of our August trades after just 18 days, and our increased emphasis on portfolio-level risk-management has left us well-positioned to add to that profit with our other two trades for this month. With 38 days left until September expiration, we’re planning to open our first position for the next cycle this week.