Note to new readers: This is a regular update on the status of our XJO Iron Condor Model Portfolio. Please read the setup post first in order to understand the objectives and the rules for trading this model portfolio.
With the XJO index settlement price (also known as the Opening Price Index Calculation or OPIC) at 5406.8 upon options expiry on Feb 20, all the options in our February iron condor expired worthless. We got to keep the entire premium received which was $1540 after brokerage costs as shown below.
So far we have had 2 winning months and collected $3700 in gross premiums as shown in the table below. We will track our performance is a similar manner as 10percentpermonth.com, who do not include commissions as this will vary from broker to broker.
For our March trade, I put on our full position (20 contracts) on Feb 7 which is about 6 weeks to expiry. This is according to the plan outlined in my last post to collect sufficient premium to meet our target of 10 percent per month. I was able to collect premium of $2200 as shown below.
For March, $2200 is our maximum profit which we will get if XJO is trading between 4750 and 5375 when these options expire on 20 Mar 2014. The margin required for this trade is $17,800 ($20,000 – $2200). This is also our maximum loss which we will incur if XJO is trading below 4650 or above 5475 upon option expiry. Hence the potential return for this trade is around 12.4% ($2200 / $17,800) before commissions. XJO was trading at around 5140 when the trade was opened on Feb 7.
With the 400 point surge in the XJO in the past 2 weeks, our March trade is in a lot of pain at the moment. Our 5375 calls are currently ITM. From this month’s trade, we can see the dangers of putting on only one trade per month. If we had put on half of our position on Feb 7 and the other half a week later like what we did for the February trade, we would be in a better position. The trade off for doing this would be lower premiums and we may not be able to get our 10 percent per month.
Hopefully there will be a pull back before the options expire on March 20. If not, we will see a big loss in March. This is why we trade with only half of our account each month. Even if we experience the maximum loss in March, we will still have enough capital to put in a similar size trade in April. Proper money management is key to trading Iron Condors successfully. Many novice traders place trades that are too large and some even do “compounding” which is to increase your trade size as your capital increases with each winning trade. 10percentpermonth recommends putting on the same size trade every month and provides examples to illustrate the dangers of compounding on their website.
I will provide another update after the March trade expires on March 20. If there are any readers out there who are trading XJO iron condors, I would like to hear from you. Please share your experience by leaving a comment or sending me an email.
Disclaimer: This post is for educational purposes only and should not be treated as investment advice. This strategy would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek investment advice if required.