SPX Credit Spread and Iron Condor Stock Options Trading Results For 2006

The 2006 trading year has come to a close and the results of our SPX credit spread options trading strategy are in.  Despite a rough fourth quarter, we did manage to out perform the major market averages for the year.

Our credit spread trading system is geared to profit from markets that are in sustained trends or well defined ranges.  When the stock market changes direction or breaks out of its range, we are in danger of sustaining a loss.

This fact is not a surprise, but is a recognized area of potential weakness for this particular options trading methodology.  Our trading plan anticipates as much, requiring us to close positions when the market encroaches too closely.  The focus is upon limiting losses when a trade does not work out as we had originally planned. 

This is what occurred in the early part of this third quarter, shortly after our iron condor was opened.  The SPX broke through resistance, consolidated for a few days and then surged higher.  In retrospect, we can see that the SPX had finished its consolidation and begun its rally back in late July, but this was not evident until resistance was breached and successive new highs were established.

A directional change will not necessarily condemn us to a losing quarter.  For example, in the second quarter of this year we took a loss in one month but still pulled out a gain for the quarter.  The fourth quarter dealt us a "double whammy", however.

With the SPX breaking out in what turned out to be a sustained rally, the volatility index (VIX) fell to its lows.  These lower levels on the VIX reflected less put option buying.  The primary wealth building tool used by this credit spread strategy in a bull market is a bull put credit spread.  We were now "sellers" in a "buyer's market".

Option premiums had been relatively rich from May through August, and even in early September, allowing us to carve out healthy profits during those months.  Those profits allowed us to stay profitable with our credit spread strategy despite what turned out to be a difficult fourth quarter.

S&P 500 Fourth Quarter Statistics S&P 500 4th Qtr Return 8.4% S&P 500 4th Qtr Range 1,335.56 - 1,418.30 SPX Iron Condor Return -13.0%     S&P 500 YTD Return 13.6% S&P 500 YTD Range 1,245 - 1,418.30 SPX Iron Condor YTD Return 51.5%    Despite a losing quarter and the S&P 500's strong advance, our    credit spread option strategy beat the index with an impressive    51.5% annualized return!

Reviewing our trade journal for the quarter will reveal that our loss in October was not particularly bad, but that with the change in trend and falling volatility levels we simply did not get any meaningful traction in November or December.  Consequently, we were unable to make up for that initial loss.

Fourth Quarter Stock Option Trading Journal      October '06 SPX Option Position      STO SPX Oct  1,360 Call      BTO SPX Oct  1,370 Call      BTO SPX Oct  1,260 Put      STO SPX Oct  1,270 Put      Opened for Credit of $1.20(Max Return 12.0%)      On Sept 26th, the SPX broke through resistance at      1,327.  With our short call option at 1,360, we still      had more than 30 points of room.  Once we reached      1,345, on Oct. 4th it was time to adjust.      The call spread was closed for a $3.80 debit.  A new      call spread was opened.      STO SPX Oct  1,380 Call      BTO SPX Oct  1,390 Call      Opened for a Credit of $0.90.      That new call was later bought back for a 0.15 debit.       The original put spread was allowed to expire      worthless.      We sustained a loss of $1.85 or 18.5% of capital      risked.      November'06 SPX Option Position      STO SPX Nov  1,420 Call      BTO SPX Nov  1,430 Call      Opened for a Credit of $0.65      The put side was never opened, primarily because the      market continued to trade away from us and provided      few opportunities to get in with an acceptable credit.      Our call spread was closed for a $0.10 debit.      The profit for November was $0.55 or 5.5% of capital      risked.      December '06 SPX Option Position      The continued upward trend in the market kept us from      opening a call spread.  We were now in a bullish mode.      Orders were placed several times for bull put spreads,      but were never filled at our limit order price.  This      was due largely to the low VIX levels and waning      demand for put options.  We simply could not get our      price.  Rather than chasing a trade, we sat out the      last month by default. FOURTH QUARTER SUMMARY                Oct        -18.5%                Nov          5.5%                Dec          0.0%                Quarterly  -13.0%

It is true that this third quarter was a disappointing one for our credit spreads, but please do not feel sorry for us.  First of all, our 51% return for the year with this strategy is nothing to be upset about.  Secondly, with the falling volatility levels it was a perfect time to open other positions with long vega.  So, we did. 

We saw 14% gains from two positions that were opened to take advantage of 1.) falling volatility levels, and 2.) a confirmed rally.  We mention not so much to ease your concerns for our account, or even to brag, but to highlight for you the fact that there are good reasons why you should limit your capital allocations.  Our fourth quarter was net positive due in no small part to conservative money management.

Good trading in '07!

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