DOCSLIB.ORG

Introduction to Debit Spreads

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Introduction to Debit Spreads © ReadySetTrade !1 Vertical Debit Spreads Overview By Doc Severson" © Copyright 2020 by Doc Severson & ReadySetTrade, LLC" All Rights Reserved" • We Are Not Financial Advisors or a Broker/Dealer: Neither ReadySetTrade® nor any of its o$cers, employees, representatives, agents, or independent contractors are, in such capacities, licensed financial advisors, registered investment advisers, or registered broker-dealers. ReadySetTrade ® does not provide investment or financial advice or make investment recommendations, nor is it in the business of transacting trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation. Nothing contained in this communication constitutes a solicitation, recommendation, promotion, endorsement, or o&er by ReadySetTrade ® of any particular security, transaction, or investment." • Securities Used as Examples: The security used in this example is used for illustrative purposes only. ReadySetTrade ® is not recommending that you buy or sell this security. Past performance shown in examples may not be indicative of future performance." • All information provided are for educational purposes only and does not imply, express, or guarantee future returns. Past performance shown in examples may not be indicative of future performance." • Investing Risk: Trading securities can involve high risk and the loss of any funds invested. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon, or risk tolerance." •Derivatives Trading Risk: Options trading is generally more complex than stock trading and may not be suitable for some investors. Margin strategies can result in the loss of more than the original amount invested. " •No part of these materials presentation may be copied, recorded, or rebroadcast in any form without the prior written consent of ReadySetTrade ®." © ReadySetTrade !2 Table of Contents Introduction to Debit Spreads 4" The Risk of Directional Long Options 5" The Probability of Success 8" The Principles of Strategy That We Follow 16" Debit Spread Entry Criteria 17" Exit Criteria for the Debit Spread 23" Finishing Thoughts 25 © ReadySetTrade !3 Introduction to Debit Spreads If you’ve been trading options for any length of time, you’ll hear endorsements shouted far and wide for the “latest in options strategies” which is usually some multi-legged beast that is complicated to place and manage, while being di$cult to speak to its supposed “edge” in the marketplace. Option traders are forever in search of the “perfect” strategy that allows us to sell premium by the pound, o&ers no risk, is directionally insensitive, and is easy to manage. " In other words, we’re looking for the options equivalent of a Money Market fund. " Without risk there is no reward, but there is something to be said about simplification and ease of management. Perhaps Einstein said it best with his quote, “everything should be as simple as possible, and no simpler.” And few trades exemplify this spirit better than the Debit Spread. " Before I get into the nuts and bolts of this strategy, you should be thinking to yourself, “why ANOTHER strategy?” Good question, and one that I had not long ago. " You see, I had an options strategy for just about every market situation - except one: trading a strong rally o& of a correction. I had tried everything to that point, and found them all challenged by the basic nature of the move which “crushed” the implied volatility. I had basically given up using options to capture directional value from these moves, and was resigned to the fact of using long stock or index futures. " And that all changed when I was introduced to the Debit Spread; the solution was literally in front of my nose the entire time. It was as simple as possible, and no simpler. " I encourage you to take your time with this material….learn the basic edge of the strategy, understand the characteristics on how the trade changes with time, price, and volatility. It should be a “foundational” trade in your trading arsenal. " Let’s start with the basics of why we need this strategy….( © ReadySetTrade !4 The Risk of Directional Long Options If you have come to the world of options trading by being taught that a single “long” option (one that is purchased to open the trade) is an inexpensive, leveraged proxy for buying the long stock, you are in crowded company. The vast majority of stock traders learn about options through this “leverage” concept, and the solution looks too good to be true at the onset. This is compounded by the fact that those that introduce you to this concept usually have something to sell you, and do so by showing magical returns of 500%…1000%…or more on a single trade. " Can this be done? Yes, it is possible. " Is it realistic, especially to a new Retail trader? No. For many reasons, the odds are not in your favor, and most traders that dive into this method of trading soon find out that there are many “land mines” or other obstacles that they have to navigate before consistent success finds them, if ever. " I’ve found that many of the lessons of trading can be related to stories that we already know and can relate to; bear with me a minute and allow me to relate long option trading with Greek mythology…." Most of you have been exposed to Homer’s epic poem The Odyssey; it tells the story of the Greek hero Odysseus and his adventures. But there’s one particular tale about his homecoming that’s important....he took so long to come home, and he did not bother writing nor updating his whereabouts via text, so everyone gave him up for dead. Suitors were after his wife Penelope, and staged a contest to win her hand. " For a suitor to win her hand, they had to string Odysseus’ bow and shoot an arrow through a dozen axe-heads, all lined in a row. None of the suitors could even manage to string the bow, let alone shoot it.... and then Odysseus, disguised as an old beggar, is given a chance as a lark and immediately strings the bow and then shoots an arrow directly through the twelve axe handles, as shown in this representation in Figure 1:" © ReadySetTrade !5 Figure 1 Of course, after that, carnage ensues while Odysseus reclaims his wife and land. (If you’re interested in the story, the 1954 movie “Ulysses” with Kirk Douglas does a good job with this scene!)" " The lesson here is that to trade Long Options e&ectively, you must also learn to shoot the arrow through twelve axe-handles of your own. You must be absolutely perfect on many factors of these trades, with almost no room for error in order to profit. " Let’s see what factors we have to get right in order to profit with Long Options:" Price Direction - you must be 100% correct in your forecast on price, at least over the lifespan of that option. " Price Velocity - the forecasted move needs to make a pretty healthy thrust in your forecasted direction, and not just meander higher over too long of a timeframe." Implied Volatility - these options are “Long Vega” meaning that if the Implied Volatility drops while you’re in the trade, the price might go higher in support of your © ReadySetTrade !6 forecast, but you’re fighting against the option-crushing power of Implied Volatility dropping. " Time to Live - the timing of the forecasted move has to fit within the “time to live” of the option that you buy. " Earnings and Event Risk - are any earnings announcements or news releases forecasted for this Stock, that could a&ect the outcome of your trade mid-stream?" I could go on but you get the idea; there are a LOT of axe-handles that you have to shoot your trade between! " Let’s consider our probabilities with a “long” directional stock trade; we have a probability of success right out of the gate of about 33%; the price must go UP, not down, and not sideways. " I would put the initial probability of success of a long call or put option trade as being much less than 33% out of the gate, for all the additional reasons listed above beyond “direction.” Is it any wonder why so many options students have di$culty right out of the gate if this is the strategy that they’re being taught? " Fortunately the Debit Spread gives us a much better chance of making a profit than a single long call or put option. Before we discuss how we’re going to construct one of these trades, let’s first talk about Probability for a minute….( © ReadySetTrade !7 The Probability of Success I have loved this expression ever since I was introduced to it using the thinkorswim platform; the name sounds impressive and implies that you will be successful! Sometimes it’s the little things that give us the edge. " What you’ll find as you get deeper into options, however, is that the concept of “probability” defines nearly EVERYTHING that we do with respect to trade logic. " Let’s begin this topic by defining some terms:" Probability of Expiring The term “probability of expiring” generally refers to the probability in percent of that option being either in the money or out of the money by one penny at the actual moment of “expiry,” or the actual expiration for that contract. Depending on the broker and their interface, this “probability” value might be displayed in di&erent manners, such as how E*Trade displays “probability ITM” as 56.08% for the FB 128 calls in Figure 2 below:" Figure 2 " © ReadySetTrade !8 While thinkorswim will show essentially the same calculation as “probability OTM” for the FB 128 calls, which will be the inverse of the value from 100% as shown in Figure 3:" Figure 3 " So the “probability of expiring” means the same thing, whether we say that this particular option has a 45% chance of being “out of the money” at that strike at expiration, or it has a 56% percent chance of being “in the money”…means the same thing with respect to the “probability of expiration.” OK, with that in mind, what is the probability that we can make money on an ATM option?" Probability of Making Money ATM I think that we can see from the chains above that your probability of making one penny or more from buying an ATM option is about 50%.
Load more

Recommended publications
  • Tracking and Trading Volatility 155
    ffirs.qxd 9/12/06 2:37 PM Page i The Index Trading Course Workbook www.rasabourse.com ffirs.qxd 9/12/06 2:37 PM Page ii Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Aus- tralia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding. The Wiley Trading series features books by traders who have survived the market’s ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional, or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future. For a list of available titles, visit our web site at www.WileyFinance.com. www.rasabourse.com ffirs.qxd 9/12/06 2:37 PM Page iii The Index Trading Course Workbook Step-by-Step Exercises and Tests to Help You Master The Index Trading Course GEORGE A. FONTANILLS TOM GENTILE John Wiley & Sons, Inc. www.rasabourse.com ffirs.qxd 9/12/06 2:37 PM Page iv Copyright © 2006 by George A. Fontanills, Tom Gentile, and Richard Cawood. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com.
    [Show full text]
  • A Fundamental Introduction to Japanese Candlestick Charting
    © Copyright 2018 TheoTrade, LLC. All Rights Reserved 1 TRADE LIKE THE FLOUNDER An overview to Matt’s trading style, methods, thoughts, and insights © Copyright 2018 TheoTrade, LLC. All Rights Reserved 2 Acronyms and Shorthand Cheat Sheet • PnL – Profit and Loss (P. and L. → P n L) • IV – implied volatility • IRA – Individual Retirement Account • Vol – Volatility (typically, IMPLIED volatility) • DTE – Days to Expiration • Roll – move an option from one strike and/or expiration to a different strike and/or expiration • ATM/ITM/OTM/DITM – At the Money, In the Money, Out of the Money, DEEP in the Money • Legging – trading a piece of a spread by itself instead of the whole spread • Skew – the difference between supply/demand (or IV) at different strikes or expirations • Front month – the shorter-dated contract of a multiple-expiration spread • Back month – the longer-dated contract of a multiple-expiration spread • Opex – Option expiration © Copyright 2018 TheoTrade, LLC. All Rights Reserved 3 PART 1 – WHAT KIND OF TRADER AM I? Vehicle, products, time frames, structures, targets, etc. © Copyright 2018 TheoTrade, LLC. All Rights Reserved 4 What do I prefer to trade? Ask most people that question, they will tell you what PRODUCTS they like to trade (GOOG, AAPL, VIX, etc.) but before you settle on a product, learn WHAT you’re trading. Things you can trade: Direction (up or down) Volatility (IV vs. HV) Correlation/Relative Strength/Beta (Pairs Trading) Mispricing/Difference in pricing (Pure arbitrage) Order Flow (HFT) M&A/Special Situations (Merger Arb) Almost ALL retail traders trade direction. I primarily trade volatility.
    [Show full text]
  • VERTICAL SPREADS: Taking Advantage of Intrinsic Option Value
    Advanced Option Trading Strategies: Lecture 1 Vertical Spreads – The simplest spread consists of buying one option and selling another to reduce the cost of the trade and participate in the directional movement of an underlying security. These trades are considered to be the easiest to implement and monitor. A vertical spread is intended to offer an improved opportunity to profit with reduced risk to the options trader. A vertical spread may be one of two basic types: (1) a debit vertical spread or (2) a credit vertical spread. Each of these two basic types can be written as either bullish or bearish positions. A debit spread is written when you expect the stock movement to occur over an intermediate or long- term period [60 to 120 days], whereas a credit spread is typically used when you want to take advantage of a short term stock price movement [60 days or less]. VERTICAL SPREADS: Taking Advantage of Intrinsic Option Value Debit Vertical Spreads Bull Call Spread During March, you decide that PFE is going to make a large up move over the next four months going into the Summer. This position is due to your research on the portfolio of drugs now in the pipeline and recent phase 3 trials that are going through FDA approval. PFE is currently trading at $27.92 [on March 12, 2013] per share, and you believe it will be at least $30 by June 21st, 2013. The following is the option chain listing on March 12th for PFE. View By Expiration: Mar 13 | Apr 13 | May 13 | Jun 13 | Sep 13 | Dec 13 | Jan 14 | Jan 15 Call Options Expire at close Friday,
    [Show full text]
  • YOUR QUICK START GUIDE to OPTIONS SUCCESS.Pages
    YOUR QUICK START GUIDE TO OPTIONS SUCCESS Don Fishback IMPORTANT DISCLOSURE INFORMATION Fishback Management and Research, Inc. (FMR), its principles and employees reserve the right to, and indeed do, trade stocks, mutual funds, op?ons and futures for their own accounts. FMR, its principals and employees will not knowingly trade in advance of the general dissemina?on of trading ideas and recommenda?ons. There is, however, a possibility that when trading for these proprietary accounts, orders may be entered, which are opposite or otherwise different from the trades and posi?ons described herein. This may occur as a result of the use of different trading systems, trading with a different degree of leverage, or tes?ng of new trading systems, among other reasons. The results of any such trading are confiden?al and are not available for inspec?on. This publica?on, in whole or in part, may not be reproduced, retransmiDed, disseminated, sold, distributed, published, broadcast or circulated to anyone without the express prior wriDen permission of FMR except by bona fide news organiza?ons quo?ng brief passages for purposes of review. Due to the number of sources from which the informa?on contained in this newsleDer is obtained, and the inherent risks of distribu?on, there may be omissions or inaccuracies in such informa?on and services. FMR, its employees and contributors take every reasonable step to insure the integrity of the data. However, FMR, its owners and employees and contributors cannot and do not warrant the accuracy, completeness, currentness or fitness for a par?cular purpose of the informa?on contained in this newsleDer.
    [Show full text]
  • Options Strategy Guide for Metals Products As the World’S Largest and Most Diverse Derivatives Marketplace, CME Group Is Where the World Comes to Manage Risk
    metals products Options Strategy Guide for Metals Products As the world’s largest and most diverse derivatives marketplace, CME Group is where the world comes to manage risk. CME Group exchanges – CME, CBOT, NYMEX and COMEX – offer the widest range of global benchmark products across all major asset classes, including futures and options based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities, metals, weather and real estate. CME Group brings buyers and sellers together through its CME Globex electronic trading platform and its trading facilities in New York and Chicago. CME Group also operates CME Clearing, one of the largest central counterparty clearing services in the world, which provides clearing and settlement services for exchange-traded contracts, as well as for over-the-counter derivatives transactions through CME ClearPort. These products and services ensure that businesses everywhere can substantially mitigate counterparty credit risk in both listed and over-the-counter derivatives markets. Options Strategy Guide for Metals Products The Metals Risk Management Marketplace Because metals markets are highly responsive to overarching global economic The hypothetical trades that follow look at market position, market objective, and geopolitical influences, they present a unique risk management tool profit/loss potential, deltas and other information associated with the 12 for commercial and institutional firms as well as a unique, exciting and strategies. The trading examples use our Gold, Silver
    [Show full text]
  • What Drives Index Options Exposures?* Timothy Johnson1, Mo Liang2, and Yun Liu1
    Review of Finance, 2016, 1–33 doi: 10.1093/rof/rfw061 What Drives Index Options Exposures?* Timothy Johnson1, Mo Liang2, and Yun Liu1 1University of Illinois at Urbana-Champaign and 2School of Finance, Renmin University of China Abstract 5 This paper documents the history of aggregate positions in US index options and in- vestigates the driving factors behind use of this class of derivatives. We construct several measures of the magnitude of the market and characterize their level, trend, and covariates. Measured in terms of volatility exposure, the market is economically small, but it embeds a significant latent exposure to large price changes. Out-of-the- 10 money puts are the dominant component of open positions. Variation in options use is well described by a stochastic trend driven by equity market activity and a sig- nificant negative response to increases in risk. Using a rich collection of uncertainty proxies, we distinguish distinct responses to exogenous macroeconomic risk, risk aversion, differences of opinion, and disaster risk. The results are consistent with 15 the view that the primary function of index options is the transfer of unspanned crash risk. JEL classification: G12, N22 Keywords: Index options, Quantities, Derivatives risk 20 1. Introduction Options on the market portfolio play a key role in capturing investor perception of sys- tematic risk. As such, these instruments are the object of extensive study by both aca- demics and practitioners. An enormous literature is concerned with modeling the prices and returns of these options and analyzing their implications for aggregate risk, prefer- 25 ences, and beliefs. Yet, perhaps surprisingly, almost no literature has investigated basic facts about quantities in this market.
    [Show full text]
  • The Impact of Implied Volatility Fluctuations on Vertical Spread Option Strategies: the Case of WTI Crude Oil Market
    energies Article The Impact of Implied Volatility Fluctuations on Vertical Spread Option Strategies: The Case of WTI Crude Oil Market Bartosz Łamasz * and Natalia Iwaszczuk Faculty of Management, AGH University of Science and Technology, 30-059 Cracow, Poland; [email protected] * Correspondence: [email protected]; Tel.: +48-696-668-417 Received: 31 July 2020; Accepted: 7 October 2020; Published: 13 October 2020 Abstract: This paper aims to analyze the impact of implied volatility on the costs, break-even points (BEPs), and the final results of the vertical spread option strategies (vertical spreads). We considered two main groups of vertical spreads: with limited and unlimited profits. The strategy with limited profits was divided into net credit spread and net debit spread. The analysis takes into account West Texas Intermediate (WTI) crude oil options listed on New York Mercantile Exchange (NYMEX) from 17 November 2008 to 15 April 2020. Our findings suggest that the unlimited vertical spreads were executed with profits less frequently than the limited vertical spreads in each of the considered categories of implied volatility. Nonetheless, the advantage of unlimited strategies was observed for substantial oil price movements (above 10%) when the rates of return on these strategies were higher than for limited strategies. With small price movements (lower than 5%), the net credit spread strategies were by far the best choice and generated profits in the widest price ranges in each category of implied volatility. This study bridges the gap between option strategies trading, implied volatility and WTI crude oil market. The obtained results may be a source of information in hedging against oil price fluctuations.
    [Show full text]
  • Options Application (PDF)
    Questions? Go to Fidelity.com/options. Options Application Use this application to apply to add options trading to your new or existing Fidelity account. If you already have options trading on your account, use this application to add or update account owner or authorized agent information. Please complete in CAPITAL letters using black ink. If you need more room for information or signatures, make a copy of the relevant page. Helpful to Know Requirements – Margin can involve significant cost and risk and is not • Entire form must be completed in order to be considered appropriate for all investors. Account owners must for Options. If you are unsure if a particular section pertains determine whether margin is consistent with their investment to you, please call a Fidelity investment professional at objectives, income, assets, experience, and risk tolerance. 800-343-3548. No investment or use of margin is guaranteed to achieve any • All account owners must complete the account owner sections particular objective. and sign Section 5. – Margin will not be granted if we determine that you reside • Any authorized agent must complete Section 6 and sign outside of the United States. Section 7. – Important documents related to your margin account include • Trust accounts must provide trustee information where the “Margin Agreement” found in the Important Information information on account owners is required. about Margins Trading and Its Risks section of the Fidelity Options Agreement. Eligibility of Trading Strategies Instructions for Corporations and Entities Nonretirement accounts: • Unless options trading is specifically permitted in the corporate • Business accounts: Eligible for any Option Level.
    [Show full text]
  • Options Strategies for Big Stock Moves
    1 Joe Burgoyne Director, OptionsOptions Industry Council Strategies for Big Stock Moves www.OptionsEducation.org 2 Disclaimer Options involve risks and are not suitable for everyone. Individuals should not enter into options transactions until they have read and understood the risk disclosure document, Characteristics and Risks of Standardized Options, available by visiting OptionsEducation.org. To obtain a copy, contact your broker or The Options Industry Council at 125 S. Franklin St., Suite 1200, Chicago, IL 60606. In order to simplify the computations used in the examples in these materials, commissions, fees, margin, interest and taxes have not been included. These costs will impact the outcome of any stock and options transactions and must be considered prior to entering into any transactions. Investors should consult their tax advisor about any potential tax consequences. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes and should not be construed as an endorsement, recommendation, or solicitation to buy or sell securities. Past performance is not a guarantee of future results. Copyright © 2018. The Options Industry Council. All rights reserved. 3 About OIC: • FREE unbiased and professional options education • OptionsEducation.org • Online courses, podcasts, videos, & webinars • Investor Services desk at [email protected] 4 U.S. Listed Options Exchanges Annual Options Volume 5 1973-2017 OCC Annual Contract Volume by Contract Type 5.0 4.5
    [Show full text]
  • Traders Guide to Credit Spreads
    Trader’s Guide to Credit Spreads Options Money Maker, LLC Mark Dannenberg [email protected] www.OptionsMoneyMaker.com Trader’s Guide to Spreads About the Author Mark Dannenberg is an options industry veteran with over 25 years of experience trading the markets. Trading is a passion for Mark and in 2006 he began helping other traders learn how to profitably apply the disciplines he has created as a pattern for successful trading. His one-on-one coaching, seminars and webinars have helped hundreds of traders become successful and consistently profitable. Mark’s knowledge and years of experience as well as his passion for teaching make him a sought after speaker and presenter. Mark coaches traders using his personally designed intensive curriculum that, in real-time market conditions, teaches each client how to be an intelligent trader. His seminars have attracted as many as 500 people for a single day. Mark continues to develop new strategies that satisfy his objectives of simplicity and consistent profits. His attention to the success of his students, knowledge of management techniques and ability to turn most any trade into a profitable one has made him an investment education leader. This multi-faceted approach custom fits the learning needs and investment objectives of anyone looking to prosper in the volatile and unpredictable economic marketplace. Mark has a BA in Communications from Michigan State University. His mix of executive persona, outstanding teaching skills, and real-world investment experience offers a formula for success to those who engage his services. This document is the property of Options Money Maker, LLC and is furnished with the understanding that the information herein will not be reprinted, copied, photographed or otherwise duplicated either in whole or in part without written permission from Mark Dannenberg, Founder of Options Money Maker, LLC.
    [Show full text]
  • Simple Robust Hedging with Nearby Contracts Liuren Wu
    Journal of Financial Econometrics, 2017, Vol. 15, No. 1, 1–35 doi: 10.1093/jjfinec/nbw007 Advance Access Publication Date: 24 August 2016 Article Downloaded from https://academic.oup.com/jfec/article-abstract/15/1/1/2548347 by University of Glasgow user on 11 September 2019 Simple Robust Hedging with Nearby Contracts Liuren Wu Zicklin School of Business, Baruch College, City University of New York Jingyi Zhu University of Utah Address correspondence to Liuren Wu, Zicklin School of Business, Baruch College, One Bernard Baruch Way, B10-225, New York, NY 10010, or e-mail: [email protected]. Received April 12, 2014; revised June 26, 2016; accepted July 25, 2016 Abstract This paper proposes a new hedging strategy based on approximate matching of contract characteristics instead of risk sensitivities. The strategy hedges an option with three options at different maturities and strikes by matching the option function expansion along maturity and strike rather than risk factors. Its hedging effective- ness varies with the maturity and strike distance between the target and the hedge options, but is robust to variations in the underlying risk dynamics. Simulation ana- lysis under different risk environments and historical analysis on S&P 500 index op- tions both show that a wide spectrum of strike-maturity combinations can outper- form dynamic delta hedging. Key words: characteristics matching, hedging, jumps, Monte Carlo, payoff matching, risk sensi- tivity matching, strike-maturity triangle, stochastic volatility, S&P 500 index options, Taylor expansion JEL classification: G11, G13, G51 The concept of dynamic hedging has revolutionized the derivatives industry by drastically reducing the risk of derivative positions through frequent rebalancing of a few hedging in- struments.
    [Show full text]
  • Evidence on the Performance of Condor Option Spreads in Australia
    APPLIED FINANCE LETTERS VOLUME 06, ISSUE 01, 2017 FLIGHT OF THE CONDORS: EVIDENCE ON THE PERFORMANCE OF CONDOR OPTION SPREADS IN AUSTRALIA SCOTT J. NIBLOCK1* 1. Lecturer, School of Business & Tourism, Southern Cross University, Australia * Corresponding Author: Dr Scott J. Niblock, Lecturer, School of Business & Tourism, Southern Cross University, Gold Coast, Australia +61 7 5589 3098 [email protected] Abstract: This paper examined whether superior nominal and risk-adjusted returns could be generated using condor option spread strategies on a large capitalized Australian stock. Monthly Commonwealth Bank of Australia Ltd (CBA) condor option spreads were constructed from 2012 to 2015 and their returns established. Standard and alternative measures were used to determine the nominal and risk-adjusted performance of the spreads. The results show that the short put condor spread produced superior nominal and risk-adjusted returns, but seemingly underperformed when the upside potential ratio was taken into consideration. The long iron condor spread also offered reasonable returns across both performance metrics. On the other hand, the short call condor, long call condor, short iron condor and long put condor spreads did not perform as well on a nominal and risk- adjusted return basis. The results suggest that constructing spreads on the foundation of volatility preferences could be a driver of performance for condor option spreads strategies. For instance, short volatility condor spreads with negatively skewed return distribution shapes appear to add value, while long volatility condor spreads with positively skewed return distribution shapes seem to be less attractive over the sample period. Overall, condor option spreads demonstrate high risk-return profiles, offer versatility in their construction and intended pay-off outcomes, create value in some instances and can be executed across varying market conditions.
    [Show full text]