July Monthly Review

Tue, Jul 21, 2009 | Jared Woodard

Monthly Review

Describing a strategy as “market neutral” isn’t saying much: consider two portfolios, one comprised of carefully proportioned long and short equity positions, the other comprised of short out of the money option gamma. Both can be described as market neutral in the sense that neither portfolio expects or wants to profit from overall market direction. Similarities end about there. I raise this point because one of the orientations that many traders think of when they hear “market neutral” is the expectation that the market will trade in a tight range or will lack clear direction over some period.

Conceptualize that range too narrowly, however, and you’re thinking of a strategy that no one would ever regard as desirable. After all, markets are always going somewhere, even if they arrive at some later date at a price not far from the current one. So when I describe the strategy demonstrated in the Condor Options newsletter as “market neutral,” I don’t mean anything like the view above, i.e. that some underlying asset is going to spin neurotically around a central pivot. It’s true that a completely motionless market would be a positive thing for iron condors, or for any other short vega position. But predicting that market prices will move in some direction, even if that direction is sideways, is still a stock-picker’s attitude. We don’t trade options as if they were merely stocks on leverage; we are instead interested in making predictions about volatility. So to conclude this belabored point: being market neutral means, to me, that the success or failure of our strategy depends not on where asset prices go (or even whether or not they go sideways), but on whether our view of volatility is correct.

This month, like most months, our view was correct.

Performance Comparison

  • S&P 500: 2.08%
  • Dow Jones Industrials: 2.39%
  • Russell 2000: 1.27%
  • S&P 500 Covered Call Fund: 1.58%
  • Condor Options VAMI: 6.65%
  • Note: the period measured is from expiration to expiration.

Our Performance page compares the value-added monthly indexes of the Condor Options newsletter, the Credit Suisse/Tremont Equity Market Neutral Hedge Fund Index, and the S&P 500.  It includes slippage (the prices displayed in the trade list spreadsheet are the actual prices at which the participating autotrading brokers were filled), but excludes any other transaction costs.

July Iron Condors

  • A technique we often use in the newsletter is to make our trades dual-purpose: the primary purpose is to generate profit, and they achieve that goal by collecting the volatility risk premium in index options. The second purpose is to hedge directional (delta) exposure as it changes over the course of an expiration cycle, and we achieve that purpose by structuring new trades to offset some of the deltas that have accrued to existing trades. This keeps our overall directional exposure low, and it also means we typically have at least one “losing” trade in a given cycle; or better put, at least one trade that is opened with the second purpose in mind. Keeping an eye on both profit potential and risk exposure reduces the volatility of returns over time.
  • SPY 83/85/99/101: 4.39% return.
  • SPY #2 80/82/95/97: 4.39% return.
  • SPY #3 86/88/98/100: -2.13% return.

July Reading

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

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  1. Predicting Price and Volatility | Condor Options Says:

    [...] Subscriber ATB raised the following insightful question in response to my comments in the July Monthly Review: [...]

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Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More


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