Condor Options

June and July brought the longest sustained period of elevated 10-day realized volatility since March, making it a challenging month for short-gamma market-neutral income strategies. Nevertheless, by keeping a diligent eye on risk and letting time decay work for as long as reasonably possible, we ended the month with a net profit.

• SPY July/August Double-Calendar (Adjusted): Closed for a loss of 57.50% after 20 days;
• SPY July Butterfly Hedge (Adjusted): Expired at a loss of 3.47% after 23 days;
• SPY July/August Calendar Spread #1: Closed with a 52.59% gain in 14 days;
• SPY July/August Calendar Spread #2: Closed for a loss of 17.86% after 10 days;
• SPY July/August Calendar Spread #3 (Adjusted): Closed after six days at a gain of 42.48%.

The average return per trade was +3.25%, and accounting for our model allocation methods, Model Portfolio return was +2.24%. Spending significant time trading just to come out with enough profit to cover most of your commissions is no cause for celebration—but we never know when the string of volatile months will end and return our strategy to the outstanding long-term performance it’s exhibited in the past.

Another positive note: I reviewed the calculations for June’s Model Portfolio return and found that the actual draw-down was about 19%, compared to the 24.8% initially reported. That doesn’t change the fact that we took a big second-quarter loss…but it’s important to keep things in perspective: Even random processes include periods (sometimes extended) of successive negative (and positive) results, and, in my humble opinion, markets are not random, as much as it sometimes looks that way—and that’s another thing we can use to our advantage.

I’m preparing another post that looks at the lessons we can take away from the July cycle and, ideally, continue to make our strategy more robust—but let’s wrap up this Update with the status of our open positions:

August Portfolio

A few minutes before the closing bell today, our open positions were showing an unrealized loss of about 4.5% on total capital at risk. That translates to an unrealized Model Portfolio return of approximately –2.26%. Considering the sharp rally this week, those number aren’t bad at all.

More important, though, is our overall risk profile. Portfolio delta and vega are lined up perfectly, and we’re still showing a projected 46% probability of profit at expiration. Our projected risk-management price thresholds have come in a little, as would be expected, but still represent a ±1.64% tolerance range. And, lest we forget, we still have half of our Model Portfolio capital available to spread out/hedge risk going forward.

Just prior to the close of today’s session, this was our current risk profile:

Again, I’ll have further analysis and comments in the next post.