Flight of the Condors: Evidence on the Performance of Condor Option Spreads in Australia

Abstract

This paper examines whether superior nominal and risk-adjusted returns can be generated using condor option spread strategies on a large capitalized Australian stock. Monthly Commonwealth Bank of Australia Ltd (CBA) condor option spreads are constructed from 2012 to 2015 and their returns established. Standard and alternative measures are used to determine the nominal and risk-adjusted performance of the spreads. The results show that the short put condor spread produces superior nominal and risk-adjusted returns, but seemingly underperformed when the upside potential ratio was taken into consideration. The long iron condor spread also offers 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.

Keywords

• Condor
• Options
• Return
• Risk
• Spread
• Volatility.