Q3 2010 Condor Options Performance Review

In addition to the regular performance data, I have a couple of interesting items to comment on for this quarterly review. First: for anyone who thinks that global equity markets may have some choppy periods ahead, this is an excellent opportunity to start thinking seriously about the role non-directional strategies should play in your portfolio. Second: we’ve added a dynamic delta hedging component to the newsletter to improve the purity of our volatility trading and to reduce unwanted risks.


In “Buying on the Dips in Your Strategy,” I explained why any rational investor, when confronted with a brief drawdown in a generally profitable and consistent strategy, will regard that drawdown as a buying opportunity. Now, it should be obvious that any Martingale approach will lead to ruin in the event of a strategy whose edge disappears, such that dip-buying is only a tentative first step in the process of forming a rational approach to allocation. But let’s not let the perfect be the enemy of the good: many investors turn their exposure to trading strategies on and off based on nothing more than their gut feelings or (in some ways, worse) their recent observed profits and losses. For heretofore discretionary investors, simply taking a more objective approach to allocation – whether Martingale-based or not – is a major step forward, like developing a germ theory of disease instead of just cleaning up the aftermath.

In the post linked above, I showed performance results from a hypothetical daily mean reversion strategy. As we might expect, trading the mean reversion of the newsletter strategy has worked well, too, as demonstrated below.

The bold green line represents actual returns; the other lines represent modifying exposure during drawdown periods by 1.5, 0.5 and 0.0 times respectively (from top to bottom). As before, reducing or eliminating exposure to the strategy after a losing period only harmed performance further, while adding exposure boosted returns. I have included the 3.45% return for the October options expiration cycle (the data point to the right of the vertical line).

Dynamic Hedging

We recently added a dynamic delta hedging component to the newsletter in order to reduce risk and gain purer exposure to volatility. Dynamic delta hedging is a method for reducing or eliminating the delta (price) exposure in an options position. Since newsletter trades are intended to take risks in the area of volatility, not price, directional exposure is an undesirable risk that muddies the water. By hedging our deltas on a discrete basis, we can ensure that profits and losses are generated by our having correct views about volatility, and not by getting lucky on some side bet regarding momentum versus mean reversion.

The component has already paid off: a solid return in October would have been substantially lower due to the positive price momentum, had we not hedged our exposure at key intervals. I’ve recorded a detailed introductory video (about thirty minutes long) on the topic for members. For more on delta hedging, see:


Performance data for the Condor Options newsletter is below, followed by monthly returns and a VAMI (value-added monthly index) comparison. Our benchmark, the CBOE Volatility Arbitrage Index (VTY), tracks the performance of a hypothetical volatility arbitrage trading strategy designed to capitalize on the difference between S&P 500 Index (SPX) option implied volatility and the historical volatility of the S&P 500 Index.

All monthly returns measure expiration cycles rather than calendar months.

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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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