Flight of the condors: evidence on the performance of condor option spreads in Australia

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.