Upon grasping the appeal of condor selling on indexes, many wonder about the merit of deploying these feathered profit-givers on multiple indexes such as the RUT and SPX simultaneously. My default response is that such a gambit is redundant due to the strong correlation between both products. That is, because RUT and SPX typically move in lockstep, a rangebound wager on one is an identical bet on the other. If one sours the other will also. So too if one soars. Thus, you’re effectively doubling your risk size if you place iron condors on both simultaneously.
A straightforward way to illustrate the historical relationship is provided below. Note the correlation indicator shown in lower panel confirming the tendency of both to move tit for tat.
The catalyst for today’s conversation is the recent divergence that has cropped up between large-caps and small-caps. The relentless rally by RUT torched many a June Condor while SPX remained contain. It was a month where an SPX condor would have won even though a RUT condor lost. The logical explanation for the stark contrast between large and small companies has been the recent muscle-flexing of the U.S. dollar. Lest you were unaware, dollar strength hurts multi-nationals due to the sizable percentage of their revenue derived overseas, and thus, from other currencies. By comparison, smaller companies care little about currency fluctuations because of their U.S.-focused footprint.
At least, that’s the narrative. To ensure the data backs this up, we turn once again to a chart overlay. This time I’m looking at the relative strength of large-caps versus small-caps using a ratio chart ($SPX:$RUT). When the line rises, large-caps are leading; when the line falls, large-caps are lagging. We will compare this to the U.S. Dollar index to see if strength from the dollar does, in fact, correlate with large-cap weakness.
The relationship seems more fickle than I would have guessed. From 2011 to 2014 dollar strength actually accompanied large-cap leadership. Only since 2017 has the strong dollar/weak large-caps narrative held true. Bottom line: this correlation looks more like it’s set in syrup than stone.
As mentioned at the outset, I’ve always been quick to dismiss condors on multiple indexes but must admit recent market behavior is causing me to revisit my assumptions. The phrase, “strong convictions, weakly held,” is relevant here. I’m not so stubborn that I am unwilling to change my tune when the market maestro modifies the melody. So, consider this me changing.
Moving forward I will be a bit more open to the idea of holding condors on SPX and RUT simultaneously with a caveat. I still believe the best way to systematically deploy this cash flow strategy is to diversify over time. Deploying a 60-day condor on RUT and SPX remains more redundant than necessary. Instead, I suggest tweaking the time frames.
If you’re a follower of the Condors for Cash Flow system, loyally transmitting RUT trades each month, then don’t also sell 60-day SPX condors. Try changing the window to something like 45 days. That will further differentiate the profit ranges on each thereby making them act more independently. Essentially, it will reduce the odds of losing on both simultaneously.
