If you know what an iron condor is—which, if you’re reading this, you probably do—you also know that it isn’t the only options strategy out there. It’s worked very well for us, consistently providing close to 10% average monthly returns—but a lot of our subscribers have expressed an interest in, shall we say, a bit more variety. Sure, our bonus trades mix it up a little, but we thought it was time we started talking about other kinds of trades on a regular basis. That’s why we’re introducing Calendar Options.

Condor’s Complement

So what’s the best way to complement our iron condor positions? We like the idea of profiting no matter which direction the market takes from week to week, especially with so much economic uncertainty out there right now. So we’re going to stick with the delta-neutral theme for our core strategies. With iron condors, though, we have just one thing working against us (besides unusually extreme price moves): we’re not neutral with respect to volatility. The strategy is characterized by negative vega—which means that if volatility rises, the value of our positions goes down. Now, we make sure we account for this fact when we decide what positions to enter and when, and as long as we’re not too close to a short strike when expiration rolls around, we get our target profit regardless of what the VIX does. But wouldn’t it be nice if we could profit from rising volatility?

If you read our March 21 post entitled “There are Only Two Types of Option Spreads”, you know there’s an entire dimension of the options universe that doesn’t come into play with condor strategies at all: the calendar spread. Generally, when the long leg of a spread is at a later expiration, you add vega to the position; more time means more premium, and volatility is a big part of that premium. So if we incorporate the calendar dimension into our portfolio, we’ll be buying volatility, as well as selling it with our iron condors.

Added Flexibility

Another benefit of calendar spreads is that they offer a great deal of flexibility. Part of the Condor Options philosophy is that we generally don’t want to mess around with adjusting our positions, because there’s usually as much risk in doing so as there is potential reward. Calendar spreads are different. While we still want to avoid over-trading, that extra dimension—time—is a wellspring of adjustment opportunities that can move our break-even points up or down if a trade is threatened, while having little or no impact on our ability to achieve our target profit.

We’ll discuss the ins and outs of calendar spreads in future posts. For now, suffice it to say that we plan to manage our risk through diversification—publishing several trades each month using different strategies, different underlyings and different strikes—as well as disciplined entries, exits and adjustments. And, when trades go well, we’ll be able to exit after only two or three weeks, keeping a portion of our portfolio safely in cash 25% to 50% of the time. (Yes, this goes against the conventional “wisdom” that it’s best to stay fully invested at all times, but at Condor Options we know that’s a load of you know what.)

Our goal for Calendar Options is the same as it is for Condor Options: to consistently achieve 10% average monthly return on capital risked. Our next post on this topic, coming up in a day or two, will tell you what you’re going to need if you want to follow this strategy.

Last 5 posts by Condor Options

• Midweek Sméagol Reading - August 20th, 2008
• More on The Correlation Game - August 18th, 2008
• August Monthly Review - August 17th, 2008
• They Have the Passports to Prove It - August 13th, 2008
• Sleepy Nasdaq - August 12th, 2008