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option trades pairs of inversely correlated and correlated ETFs, including leveraged ETFs.
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Counter-CondorCounter-CondorThe Ultimate in Market NeutralityThe Ultimate in Market Neutrality
Jay A. Leavitt, PhDJay A. Leavitt, [email protected]@GrabtheCashandDash.com
Market NeutralityMarket Neutrality[expected][expected]
TNA + TZATNA + TZAQLD + QIDQLD + QID
On any given day, if you were to trade both members of either pair,
at the end of the day you would expect to end up even
TestingTesting
All Entries 3 to 5 weeks from Expiration
Trades closed at next expiration Date
ThinkorSwim data & results in TOS Paper Trader
New ApproachNew ApproachThe Counter-Condor StrategyThe Counter-Condor Strategy
Two spreads, one per ETF Just Out of the Money [OTM] Short time to expiration
Individually, each spread has Low Probability• The spreads are chosen so that as one decreases in
value, the other increases Each spread has a good Reward to Risk ratio Stop losses are not used
Money ManagementMoney Management Trade Allocation
It is possible to have 100% loss! It never happened in the TNA/TZA back-test.
Only amount we can afford to lose – even in 2 consecutive trades
Fixed amount allocated to each trade
ExampleWith a trade equity of $100,000 allocate 10% [$10,000]Based on our data, this account will have a negligible draw-
down. The allocation grows ~ 12 x 35% / year = 420%. The account grows 42% annually.
Profit/LossProfit/Loss Red and Blue are the Profit/Loss curves for the spreads on the inverse ETF pair.
Green is their sum. It is the Profit/Loss curve of the pair trade. Loss in one spread is
offset by a gain in the other.
Both wings are the same height.
Extension to Correlated ETF PairsExtension to Correlated ETF Pairs
84% Winning Trades; Average Gain per Trade > 50%
Repair StrategyRepair Strategy
Each spread is only 1 point Each ETF is 3X leveraged
Therefore, we anticipate 100% winners• This is unrealistic!
If the price of our ETF is between strikes when close to expiration Buy ATM Condor of underlying or Roll trade to next month
Repair ExampleRepair Example
Assume we’re trading the TNA/TZA spreads and TZA is between its spread strikes
Buy the ATM condor for IWM TNA, TZA are 3X leveraged of IWM
How many to buy? When the condor credit matches the pairs trade
risk the 2 trades will neutralize each other. IWM is used because its options are much
more liquid than the ETF [email protected]
Wrap-upWrap-up
Counter-Condor is a powerful trading system Market Neutral High probability of a winning trade High average trade gain Low exposure to risk Couch Potato Repair Strategy
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