I’ve suffered through my fair share of naughty birds, but 2020 has taken adversity for Cash Flow Condors to a whole ‘nother level. Epic volatility ushered in by a global pandemic unleashed a flurry of foul fowls. The speed of the descent delivered losses for March and April. And the speed of the subsequent ascent dealt deathly blows to June and July.

With so many losses in a row, the faith of many has been jeopardized. Loss-ridden traders rightly wonder if we’ve entered the dark ages for the once-mighty condor strategy. In less poetic terms – are we in a market regime so volatile and so plagued by massive directional moves that condors are forevermore a money-loser? Has the once-sharp edge of the Cash Flow Condors system been so thoroughly blunted that profits are now a fantasy?

The answer is no, and I’ll tell you why.

Edges Blunted

We define an “edge” as a system’s ability to produce profits over time. It is what gives you the confidence needed to stay the course during adverse times. Absent an edge, your strategy would generate losses. Not every time, but over time. A system with an edge has a positive expectancy. The average outcome is profitable.

I outlined the dynamics behind the Cash Flow Condors system’s edge in its video series. It lies in the overpricing of options. In the past, implied volatility has been higher than actual volatility. The reason has to do with fear. Because traders fear market crashes, they willingly overpay for insurance.

But they aren’t always overpriced. Sometimes actual volatility is higher than what was baked into options premiums. That’s when condors lose. Consider 2020 a perfect example of market movements blowing out expectations.

As annoying as it’s been, I still believe it’s an aberration. As markets normalize, profits should return. Admittedly, it’s taking much longer than I’d like.

You can argue the contrary if you’d like. Some might say that options are now destined to be underpriced – that the market will continue to move more than expected. But every other instance of this happening in the past has been temporary. Eventually, condors return to churning out profits. The only question is whether you’re there to collect.

Unfortunately, every losing streak leaves victims by the wayside. Wounded and discouraged, they abandon their once-loved system. The sting of losses combines with the pull of potential – and easier – profits elsewhere. And they’re left to forever wonder if they would have recovered had they but stuck with it.

What More Could I Have Done?

Your ability to withstand losing streaks like this comes down to two things: Position Sizing and Complementary Positions. Position sizing is simple. If you allocate too much of your portfolio to Cash Flow Condors and then suffer a three or four-month losing streak, it will be challenging to stay the course.

The primary reason why I can withstand prolonged drawdowns is that I only invest a small percentage of my portfolio to the system. Does it mean that I don’t make as much on a winning month? Of course! But, more importantly, it means that I never quit during a losing streak.

As for complementary positions, I’m talking about hedging or employing directional trades concurrent with the condor to offset the loss. Ideally, I would have had some bear trades throughout February and March to lessen the sting of the losing bull put side of my condor. And, I would have had some bull trades throughout April, May, and June, to soften the blow to the bear call side of my condor.

If you’re able to run a trending system with a neutral one, then the strengths of one offset the weaknesses of the other.

A Tale of Two Pupils

Here lies a tale of two traders. One lives alone in a silo. He watched the Cash Flow Condors premium system and has been dutifully deploying it for years. But when the 2020 gauntlet arrived, and he experienced his largest losing streak ever, he quit. The pain was too potent.

Our second trader started the same way, but after watching the system, she got engaged with the community in our clubhouse. She religiously attended every single monthly mastermind group meeting to see just how everyone else was entering and managing their positions during good months and bad. As a result, she picked up tips along the way. The importance of small sizing was beaten into her head. She learned the intricacies of hedging and using complementary systems. She received context, wisdom, and motivation to keep her in the game along the way. And then, when 2020 arrived, magic happened. She survived the losing streak. It wasn’t full of pleasure, but the pain was minimal, and the pull to quit was nonexistent.

All because she took advantage of the resources at her fingertips.

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