Condor Options

With a day and a half of time decay, plus a slight drop in volatility skew, we ended the Tuesday trading session with a small gain despite the $0.80 lift in SPY and the decline (again, slight) in average IV for SPY options since we opened our first December position with a bearish bias yesterday morning. In the final seconds of trading today, the SPY Dec/Jan 108 put calendar was trading around $1.06, giving us a paper gain of 0.95%. Since our risk profile is essentially unchanged, except that our base-position delta is now –6.7 (thanks to the contribution of nearly a point’s worth of gamma), anyone who wants another look at the graph can refer back to yesterday’s analysis.

November Review

What’s more important, since the previous Update, than the minuscule change in our open position is the fact that we closed out our November portfolio:

• SPY November/December Calendar Spread #1 (108 Calls): 33.33% return – Although we needed to take defensive action at one point (in the form of our third, very short-lived, position), the market ended up making this our most profitable trade, with a return well above our 20% – 25% target range.
• SPY November/December Double-Diagonal (99/104/114/119): 8.56% return – We used this trade to put some more cash to work when the time window was right, but we had no change in underlying price against which to diversify our portfolio. Once we decided to book the 23% (average) return we were seeing in our two calendar spreads, this position left us with a strong bullish bias—and by that time we didn’t have very attractive adjustment options if the market decided not to play along.
• SPY November/December Calendar Spread #2 (103 Calls): 13.33% return – This third position kept us from having to adjust the other two—which is especially nice when it comes to the double-diagonal, since position-level adjustments are relatively costly and a little tricky to manage. We were only in the trade for six days, and in that little time, any profit over 10% will do quite nicely, thank you.

Altogether, we generated a model portfolio return (which includes initially setting aside 25% of the capital allocated to the strategy, in case it’s needed for adjustments) of 13.81%, and our average risk exposure was 16 days.

Looking Ahead

The kind of results we achieved this month and last (9.99% model portfolio return) are what we’re striving for on a consistent basis, month after month. The market won’t always cooperate, and there will be losing months in the future—but our risk-management rules are designed to keep any one losing trade (month) from exceeding what we can reasonably expect to recover in the next trade (month) or two.

As of 9:45pm est, S&P futures are holding an after-hours breakout over today’s intraday highs. If the rally continues, we’ll be entering our second December position before the end of the week.