The most interesting feature of December 2008 was the rate at which volatility – both historical and implied – declined. While we could view this decline as simply the counterpart to the volatility explosion we saw in the fall, the changes were still very interesting to watch. A rapidly falling volatility environment was ideal for the December expiration positions we published, though it also presented some challenges for the iron condor strategy we follow in our newsletter: specifically, we have been more interested in long vega positions of late as we wait for implied volatility to revert in the direction of a longer term mean.
Since our last monthly review, we have introduced two new risk management features on the members-only area of the website:
- Sigma Stop Indicator: this is a broad market indicator we developed in 2008 that has proven helpful for identifying unusual or abnormal market environments. It is based on changes in the relationship between historical and implied volatility over several periods. We developed the indicator on an older data set, and when we subjected it to walk-forward testing through 2008 it correctly anticipated the major declines in January, June, and September-October. So we are understandably excited about the potential of this indicator.
- Daily & Weekly Allocation models: we also began publishing readings of the allocation models we use for short- and medium-term trades. These are also geared toward allowing us to tread lightly (or even not at all) during periods of unusual market activity, and conversely to allow us to be as fully allocated as possible when the broad market is behaving as we expect it to.
- S&P 500: 10.98%
- Dow Jones Industrials: 6.62%
- Russell 2000: 19.61%
- S&P 500 Covered Call Fund: 17.43%
- Condor Options: 3.09%
- Note: the period measured is from expiration to expiration, rather than from the start of the month.
December Iron Condors
- SPY 66/68/98/100: 22.85% return.
- IWM 37/39/57/59: -0.019% return.
Here are some posts from the past month that are worth checking out if you didn’t catch them the first time around: