We feel like we’re saying this every month, but it sure feels nice not to have any skin in the game come expiration day. Options expiration surely had something to do with the intensity of today’s selloff, and this was a textbook case of why we never hold positions into expiration.
The fancy-pants phrase for the influence options expiration had today is “negative gamma.” The practical significance of that phrase is that when we gapped down at the open, lots of traders who were short options that they assumed were going to expire worthless were suddenly holding contracts that were now at or in the money. They have to take action to deal with the situation, and all that covering and hedging of those shorts only adds fuel to the fire.
We got a long, low-volume midday pause, but then the selloff resumed after lunch. You know there were some unfortunate souls still holding short puts at SPX 1320 or SPY 132 who were sweating into their turkey sandwiches, hoping we would bounce or tread water into the close. Sorry, guys.
Keep reading for more performance data and trade analysis…
Here’s how the major market indexes, the S&P 500 Covered Call Fund (BEP), and the Condor Options trades performed over the past month:
- S&P 500: -7.54%
- Dow Jones Industrials: -8.81%
- Russell 2000: -2.09%
- S&P 500 Covered Call Fund: -5.62%
- Condor Options: 15.50%
- Note: the period measured is from expiration to expiration, rather than from the start of the month.
We went 3 for 3 this month and our yearly average return on capital risked, per trade, finally moved back above 10%. We have to point out that part of our good showing this month was due to picking the right underlyings – by focusing on the relative strength in the Russell 2000 and Nasdaq 100 and keeping the S&P 500 on a tighter leash, we were able to reduce our downside risk.
One notable aspect of this month’s positions is that they were profitable in a rising volatility environment, which might be surprising given that iron condors are always short-vega trades (meaning that they expect implied volatility to decline). But it’s important not to become myopically focused on volatility: theta matters, too! And in this case, the time decay in these positions easily outran any pressure from rising implied volatility.
June Iron Condors
- SPY 132/134/150/152: 11.56% return – This was the first trade we published for June expiration, and also the first one we exited. We closed out this position on June 2 in order to lock in profits and protect our downside. Notice that holding this trade through to expiration would’ve resulted in a maximum loss situation: you would’ve gone to bed last night feeling a tad nervous but basically okay, and by the close today that probable winner would’ve turned into an absolute loser. This is precisely why, increased commissions or not, we always want to exit positions before expiration. One sudden killer loss of this sort will destroy a year’s worth (or more) of commissions saved and credit earned by letting your trades expire. The negative gamma risk near expiration just isn’t worth whatever pennies are left in your front-month spreads.
- IWM 66/68/78/80: 25.97% return – We closed out the put side of this position for $0.06 last Friday. This trade worked out perfectly, since IWM held up nicely while the Dow 30 and S&P 500 sold off this month. Some traders only trade iron condors on some favorite index of theirs – the SPX, say – but this position is a good example of why diversifying our trades across multiple underlying indexes makes so much sense. We trade indexes to avoid the event risk associated with individual stocks, but in an economy this uncertain it’s worth paying attention even to the composition of the various indexes.
- QQQQ 43/45/52/54: 8.98% return – These extra wide, low credit trades really are barely worth the trouble. We put on this QQQQ position to balance out our other narrower trades, but because this position got started so late in the expiration cycle it was only ever going to be a team player, not a superstar. We are continually baffled by traders who enter only extra wide, low credit trades month after month – that’s just asking for trouble.
Here are some posts from the past month that are worth checking out if you didn’t catch them the first time around:
- Fire and Forget: Iron Condors Have Built-in Hard Stops
- Playing Defense First
- Calendar Options: Adjustments, Part I – Why We Adjust
- Calendar Options: Adjustments, Part II – When We Adjust
- Calendar Options: Puts or Calls?
- Straddle Strangle Swaps
We’re already in two July positions (Portfolio) and will probably enter a third position next week. In last month’s performance review, we said that we were hoping for implied volatility to pick up this summer, and so far we haven’t been disappointed. If the markets can keep this up for a few more weeks maybe, just maybe, there’ll be a chance of ruining the planned Long Island getaways of those Wall Street bastards.