We’ll keep this review short, as there are just about 12 hours before the Monday open, and some of us here at Condor Options World Headquarters are dead tired.
You probably don’t need us to tell you that the markets have taken a turn for the worse, and that “the top” may very well be in. It certainly looks that way in China. If you have been living under a rock for the past few weeks, go read up on all the buzzwords:
credit crunch, subprime meltdown, Citigroup CEO, Fed rate cuts, big bank bailout, dollar decline, sovereign investment funds, $100 oil, cash-strapped consumers, gross incompetence and criminal activity at every level of the current Administration
Okay, we threw that last one in for fun (though you can’t say it’s entirely unrelated). The point here is that troubles that have long been obvious to anyone with ears to hear have now been made clear to everyone, and the fundamental situation has changed. Indexes that were providing leadership (Nasdaq 100) are now doing no better than the recent laggards (Russell 2000).
It should go without saying, but it usually doesn’t, so we’ll say it: if the market drops 4% and your portfolio value drops 0%, guess what? You just outperformed the market by 4%, congratulations! If the market drops and your portfolio value goes up, double congratulations! By that metric, we should be popping the champagne open this month, were we not so humble.
We did have a losing trade this month, the DIA position, which lost 6.3%. But our two SPY positions gained 26.9% and 12.8%, giving us an average this month of 11.1% per trade. These were fairly straightforward trades and didn’t require any intra-cycle adjustment. Two comments, though: 1) under less extreme conditions, opening the second SPY trade after a major downward movement would have yielded a much better return; it didn’t pan out that way in this case because of the heavy selling last week; 2) exiting a bit earlier in the week would have yielded slightly better performance, but we stand by our exit strategy, since statistically speaking the probability of accruing more premium in the latter half of the week has greater than the likelihood of a major market event. This game is all about probabilities, pricing, and discipline – not hotshot “gut feelings”. We want to be the casino, not the gamblers.
We’ll probably enter two positions this week regardless of how calm or crazy things get, for the simple reason that this volatility premium is too good to pass up (VIX at 28), and we all know that historically speaking, the implied volatility over a given period is usually greater than the actual volatility over that period.
[tags]market commentary, iron condor, options trading, November, monthly review, trades, Nasdaq, Russell 2000, DIA, SPY, QQQQ, IWM, RUT, NDX, VIX, volatility, China, Citigroup, subprime[/tags]