Market Regimes and Strike Selection: A Case Study on the Call Condor

Parameter optimization is a technique used in trading strategy design. It is used to identify the best set of parameters for maximizing performance and to study the strategy dynamics in order to gain insights. However, while this technique is frequently applied to linear instruments, it is used less often on non-linear instruments, such as options. This is likely due to the complexities involved in modeling non-linear instruments.

Reference [1] attempts to optimize the parameters of a popular options strategy, the call condor. The authors studied strike selection within the context of a specific market regime. They pointed out,

Next, the study examines how market scenarios impact the results mentioned above. As shown in Pane A of Figure 4, widening outside ranges is more feasible for the neutral market than for the bullish and bearish markets. Three curves represent the dynamics of fair value for the LCC strategy over the widths of the outside ranges given three market scenarios. The fair values gradually increase over the widths of the outside ranges for all market scenarios. However, a wider range of outside strikes can boost profits more in the neutral market scenario because the future market price is more likely to fall in the range. Our findings suggest that a wider range of outside strikes is more appropriate for the neutral market.

Although a wider inside range (K3 – K2) of strike prices can yield a lower fair value for the LCC strategy, the trader obtains relatively lower profits in both bearish and bullish markets and higher profits in the neutral market. The economic implication is that strategy traders can achieve greater profits by choosing an exact portfolio of options with a narrower range of strikes to capture specific market scenarios. Suppose the strategy traders remain in a bullish or bearish market. In that case, they should adjust their choice of inside ranges to align closer with the prevailing bullish or bearish market conditions, respectively.

In short, by analyzing the optimal parameters, the authors identified the most favorable market environment for each strike selection.

Note that the study was conducted using theoretical option prices rather than traded prices, but it still offers valuable insights. Portfolio and risk managers can benefit from this type of simulated study to enhance their understanding of strategy and decision-making.

Let us know what you think in the comments below or in the discussion forum.

References

[1] Jin-Ray Lu, Motsa Zandile Tema, Evaluating the Choices of Strike Ranges for the Long Call Condor Strategy, International Review of Accounting, Banking and Finance, Vol 17, No. 1, Spring, 2025, Pages 42-56

Article Source Here: Market Regimes and Strike Selection: A Case Study on the Call Condor

source https://harbourfronts.com/market-regimes-strike-selection-case-study-call-condor/