Condor Options

We’re a bit behind on Calendar Options reviews, so we’re making this one a double-header— quite apropos, as it turns out, because the story is much the same for April and May: A strong market uptrend and steadily falling implied volatility continued to work against us, but we still came through each cycle with a profit. That makes three straight months in which we’ve shown that a market-neutral income strategy using calendar spreads can work in trending markets, even when implied volatility falls at rates seen only in extreme bear-market (and bear-market-ending) rallies.

April Performance Comparison

• S&P 500: +13.15%
• Dow Jones Industrials: +11.72%
• Russell 2000: +19.81%
• S&P 500 Covered Call Fund: +17.12%
• Calendar Options: +2.38%
• Note: The period measured is from expiration to expiration.

May Performance Comparison

• S&P 500: +1.53%
• Dow Jones Industrials: +1.69%
• Russell 2000: –0.74%
• S&P 500 Covered Call Fund: –2.25%
• Calendar Options: +5.13%
• 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.

April Trades

• DIA April/May 59/64/76/81 Double-Diagonal: 1.62% return – We entered this trade right in the middle of the steep March rally, but we didn’t have to make a risk-management adjustment until the Dow broke through resistance at its 50-day moving average 11 days into the trade. A week later DIA hit the lower adjustment threshold for the modified position, but our trading rules saved us from a whipsaw adjustment. With the market continuing to zig-zag higher and implied volatility breaking below its prior bear-market lows, we exited the position four days before expiration to reduce our portfolio delta and vega risk.
• DIA April/May 70/78 Double-Calendar: 7.36% return – We opened this position a week later than the double-diagonal, with the Dow 400 points higher. As the market continued to rally, the higher range of the position kept us from having to roll up until after the April 2 gap. That adjustment left us better positioned to ride out the remainder of the cycle, but it also resulted in a triple-calendar that required two closing orders—one with positive delta and the other with negative delta. Minutes after we entered those orders, a steep rally left part of the negative-delta order unfilled; we closed out the remaining contracts the next morning at a lower (but still profitable) price. The return shown is based on the average of the two prices.

We’ll review our May trades in detail in Part II.