ROI Note Iron Condor May 7 2017

As of early April 2017 we completed all of the necessary adjustments to our trades and we successfully held the accounts relatively flat through the adjustment period. We booked a 6.9% gain for April, and we are now “back to work” in generating positive returns.

Ever since the Trump win in November 2016 stocks trended higher in anticipation of a reduction in regulation, faster GDP growth, and an incremental $8 of S&P500 earnings that would be created by a corporate tax cut. When the market trends strongly, either UP or DOWN, this is not optimum for credit spreads and we switch gears into adjustment mode with the primary objective of moving our trades in the direction of the trend and holding the cash balance in the accounts flat. In the case of the +15% rally caused by the Trump win, we moved our trades upward, and we successfully kept the monthly realized losses near 2% that held the cash levels in the accounts mostly flat.

Different strategies will “take turns” in making positive returns throughout the year. For example, a “long only” strategy of buying stocks or ETFs did well from mid-November 2016 after the Trump win, through March 1, 2017. Stocks will probably continue to move a little higher, as of mid-May 2017, but the returns will be more muted in the 2nd half of 2017; the market is already trading at an expensive valuation of 17.8x forward S&P500 earnings.

Alternatively, non-directional strategies, like the Iron Condor 1 (IC1) strategy will not make positive returns when the market is trending strongly. Once the market is done trending and starts to trade range bound, non-directional strategies will kick-in and start making money. Historically, the stock market will trend about 4 to 5 months of the year and then trade range-bound for 7 to 8 months of the year. Therefore, it’s recommended to diversify one’s portfolio with two to three strategies and hold them for at least a year because it’s very difficult, if not impossible, to successfully rotate cash into the correct strategy at the right time.

As a general guideline, the IC1 strategy historically makes a positive return of 7% to 10% per month for 7 to 8 months of the year as the market trades range-bound. For 4 to 5 months of the year the market will historically trend upward or downward and we’ll switch into adjustment mode realizing 2% to 5% losses per month, which allows us to hold the cash balance in the accounts mostly flat. When you add up the returns over a full 12 months, we historically can make some handsome returns. Therefore, going through adjustments four months out of the year is just part of being in the business of writing credit spreads.

Getting through an adjustment period and successfully holding the cash balance in the accounts flat is not easy to do and takes a lot of experience. We believe the Upside Options team is the best in the business in navigating through strongly trending markets.