The Condor Options newsletter portfolio returned 21% in 2012, versus 17% for the S&P 500. The strategy also beat the S&P 500 in the final quarter of the year, giving back 1.1% versus the SPX loss of 2.05%. We also bested the CBOE Volatility Arbitrage Index (VTY) for the year by about 3 percentage points.
The purpose of the strategy is to profit from the volatility risk premia that are priced into options. While the volatility risk premium is a consistently observable, ongoing feature of option markets, the strategy does not adopt an agnostic, “always on” approach. Instead, we select trades in markets where the expected risk-adjusted premium is the greatest.
About one year ago, we expanded the coverage universe of the strategy to take advantage of opportunities not just in equity indexes but also in commodities, currencies, and global stocks. We had profitable trades in 2012 in the euro (FXE), gold (GLD), crude oil and natural gas (USO, UNG), as well as in the familiar U.S. index products (SPY, IWM, DIA, QQQ). The other major strategy change made in 2011 was the addition of a dynamic delta hedging regime that includes position sizing criteria and distinct hedging trades. Despite the coverage of various delta hedging approaches in the academic and sell-side research literature, I still am not aware of any competitors or peers that publish strategies at this level of sophistication.
Since last quarter’s performance review, we have also significantly expanded the weekly update note, which now includes the following:
- performance summary and current portfolio P/L statement
- market outlook and plans for the week ahead
- market health snapshot, with quantitative estimates of the momentum, term structure, and volatility of volatility
- volatility risk premium ranks for major asset classes
- S&P 500 implied volatility skew update
- other research output, charts, etc. where relevant
One of the most frequently asked questions we receive is how to manage positions that are under pressure or are unprofitable, and there have always been vendors and others selling tips on how to “adjust” losing iron condor positions; one unique feature of our strategy is that it does not depend on overwrought, complex adjustment techniques, relying instead on straightforward delta and gamma updates and the intuitive idea of spreading risk across a book of trades. Real-time and historical results speak to the effectiveness of our approach.
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 returns measure expiration cycles rather than calendar months.
Our average hold time for each position has been about 35 days, and our delta hedging trades are updated weekly but only when needed – so this isn’t a strategy that requires constant attention or active management. We are accepting new clients at this time.