Title
Flight of the condors: evidence on the performance of condor option spreads in Australia
Document Type
Article
Publication details
Niblock, SJ 2017, 'Flight of the condors: evidence on the performance of condor option spreads in Australia', Applied finance Letters, vol. 6, no. 1, pp. 38-53.
Peer Reviewed
Peer-Reviewed
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. It is suggested that risk averse investors best avoid condor
option spreads, while those with above average risk tolerances may be
well suited to the strategies, particularly short volatility-driven condor
spreads.