Condor Options

The first month of Calendar Options trading was characterized by the high day-to-day price volatility typical of market transitions. As the late-March to mid-May bear-market rally came to an end, we were buffeted in the buying climax and the sharp selling that followed—but we still came out with an average profit of 6.59%, handily beating the market. (If you’re wondering how we come up with our dollar return and percent return figures, see Calendar Options: How We Calculate Returns.)

Performance comparison

Market performance for the past month:

• S&P 500: ?7.54%
• Dow Jones Industrials: ?8.81%
• Russell 2000: ?2.09%
• S&P Covered Call Fund: ?5.62%
• Calendar Options: 6.59%
  Note: The time period measured is from expiration to expiration.

June Calendar Spreads

• EEM June/Sept 140/150 Double-Calendar: 16.72% return – No sooner had we opened this trade than EEM took off on a 5% rally over four days, forcing an adjustment. The following Monday brought a dramatic reversal, and three weeks later EEM was nearly 10% off its climax high, when we had to unwind the first adjustment. A relief rally brought the position back to our 15% minimum profit target Monday before expiration.
• RTH June/July 95/100 Double-Calendar: –4.23% return – We opened with RTH in the middle of what looked like a developing trading range. We were right about the trading range, but two adjustments were triggered, by a false breakdown and then a false breakout. With our position on the ropes, we made a third adjustment to up our odds of recovering our loss. On Monday before expiration, we were able to close nearly all of our position for a 1.41% loss; but to get the remainder filled we had to lower our limit price later in the day, for a 7.04% loss. The –4.23% return above is the average of our two fills.
• IBM June/July 125 Calendar Spread: 7.28% return – IBM had its share of volatile swings as well. A sharp two-day rally, culminating in a breakout, triggered a first adjustment, and after a reversal and two 2+ standard-deviation down days, we needed to reduce our risk by adjusting again. With the market looking shaky and our gamma risk growing, we closed the position four days before expiration for a modest profit.

June Reading

Anyone interested in following the Calendar Options strategy should be sure not to miss these key posts:

• Introducing Calendar Options
• Calendar Options: Five Things You Need to Know About Calendar Spreads
• Calendar Options: Puts or Calls?
• We Get Letters: Calendar Options Position Sizing
• Adjustments, Part I – Why We Adjust
• Adjustments, Part II – When We Adjust
• Calendar Options: How We Calculate Returns
• Adjustments, Part III – How We Adjust

We opened one July calendar spread, on EEM, last week. Even though EEM lost $4.63 on Friday—twice the one-day standard deviation—we’re already showing a small (1.15%) profit. We plan to enter another position this week if volatility stays near its Friday range, or drops significantly.