Condor Options

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 [tag]options expiration[/tag] cycle was one of the most [tag]volatile[/tag] 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 [tag]mortgage meltdown[/tag] finally show effects proportional to the real significance of the crisis. Helicopter Ben’s surprise discount [tag]rate cut[/tag] 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.

[tags]spy, iwm, iron condor, bernanke, options trading, volatility[/tags]