Condor Options

In last month’s review, we noted that extremely volatile market environments can sometimes be your friend:

The good news is that, as we’ve been advising our subscribers, periods following intense market selloffs historically have been the most profitable ones for our strategy, and as implied volatility has already declined from its earlier peaks, we are already seeing some fantastic profits on our positions for the November cycle.  An elevated volatility environment is torturous for swing traders and ulcer-inducing for stock investors, but it’s actually the ideal environment for option sellers.

The November cycle proved that tendency once again: as the market recovered from its worst October levels and volatility pulled back from its historic highs, our market-neutral positions performed extremely well.  Just to be clear, it’s not necessarily the market-neutral orientation that made our November positions so successful, but more the fact that we were positioned to sell options when they were priced at those historic highs.  Of course, extreme volatility can always get more extreme, which is why we: a) always open multiple positions with staggered entries – rather than just one position – and b) continue to emphasize risk management.  In addition to our standard newsletter positions, we now also publish several powerful risk management metrics on the members-only area of the site.

As for the market, we see no reason to change our general view.  The market is:

1. Abnormal – For weeks now, many historical and technical (and even some value) indicators have been stretched beyond the point of usefulness, and it may take several weeks of quieter, more predictable action before it’s clear that this market is even tradeable again in any size.
2. Epiphenomenal – the market is like the smoke belched forth from the sputtering locomotive that is the U.S. economy.  Market movement may seem dramatic and important and is obviously highly visible, but just like the smoke, it is an opaque signifier and a non-causal force.  We are hurtling down the tracks not because of the shape of the smoke, but because the economic engine is out of control.

Performance Comparison

• S&P 500: (14.94)%
• Dow Jones Industrials: (9.10)%
• Russell 2000: (22.77)%
• S&P 500 Covered Call Fund: (18.18)%
• Condor Options: 17.40%
• Note: the period measured is from expiration to expiration, rather than from the start of the month.

We continue to urge our subscribers to stay primarily in cash, as the market continues to behave abnormally.  It’s nice that we beat the indexes as well as our chosen benchmark (BEP), but for the sake of every market participant we’d like to see things quiet down a little, even if that just means an orderly and plodding bear market.

November Iron Condors

• SPY 84/86/118/120: 8.33% return.  We exited the put spread on this position on Nov. 11, as the gains from the rally the week prior had been given up and market internals were even more negative than the price action.  By taking some profits rather than holding to expiration, we were able to turn what would have been an absolute loss into a decent little win.
• SPY 80/82/109/111: 22.55% return.
• SPY 73/75/106/108: 21.33% return.  This position balanced out our directional risk nicely, and once again, by closing out trades before expiration week we were able to avoid quite a lot of unpleasantness.

November Reading

Here are some posts from the past month that are worth checking out if you didn’t catch them the first time around:

• Volatility as an Asset Class (Review)
• Testing the VIX:VXV Ratio
• The One Valid School of Analysis
• Allocation in Abnormal Markets