The iron condor newsletter returned over 18% in the final quarter this year, versus 3% for the benchmark and market index, and also managed to outperform both the market and our benchmark for 2009. Just as importantly, our maximum drawdown (9%) and standard deviation (5.6%) were nearly identical to those of the market as a whole (9%, 5.7%), indicating that we also outperformed on a risk-adjusted basis.
There is a common misconception that an iron condor options spread is only suitable during a range-bound market. Our performance this year should permanently dispel that notion. The only obviously range-bound trading in 2009 was during late November and December, and even if we exclude the 9% return for the December options expiration cycle, the newsletter still outperformed the market with a lower standard deviation.
Back in October, I decided that publishing monthly performance reports was sending the wrong signal to our readers. Retail investors are already notorious for chasing performance, and I thought it might be helpful to reduce the frequency of performance reports so that there are fewer opportunities for anyone to draw undue conclusions about performance, whether positive or not.
Since I’m drafting the template for quarterly reviews from scratch, I took this opportunity to make a major change to the benchmarks used for comparison. Previously, we tracked the newsletter performance against the S&P 500 and the Credit Suisse / Tremont Equity Market Neutral Hedge Fund Index. The latter was never a very good fit, and after getting hammered in the financial crisis, the hedge funds that comprise that index seem mostly to have flat-lined. So I’ve replaced that index with the CBOE Volatility Arbitrage Strategy Benchmark (VTY), which is a very good fit, since it pursues a strategy very similar to the one followed in the newsletter:
[VTY] tracks the performance of a hypothetical volatility arbitrage trading strategy designed to capitalize on the historical difference between S&P 500 Index (SPX) option implied volatility and the realized, or historical, volatility of the S&P 500 Index.
In 2008, VTY fell 57% in October and 33% in November (using expiration cycles rather than calendar months), but it has resumed its normal pace in 2009, so I expect the Volatility Arbitrage Index to provide some good competition in the future.
Performance data for the Condor Options newsletter is below, followed by monthly returns and a VAMI (value-added monthly index) comparison.
All monthly returns measure expiration cycles rather than calendar months.