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 5485 upon options expiry on May 15, all the options in our May XJO iron condor expired worthless. We got to keep the entire premium received which was $1840 after brokerage costs as shown below.

So far we have had 5 winning months and collected $10,100 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 June trade, I put on our full position (20 contracts) on May 9 which is about 6 weeks to expiry just as we did in previous months. As discussed in my April update, we realised that we needed to reduce our maximum loss to 7 times premium received so that our trading system will have positive expectancy.  The easiest way to do this would be to set a stop loss to close our short options. If we have a stop loss in place, we really do not need to buy the insurance options which we previously used to limit out maximum loss. For June I simply sold calls and puts which made our position a “short strangle” rather than an iron condor as shown below.

I sold options at strike prices with enabled me to collect a premium of 5 points which was what I used to get for each of our spreads in our iron condor. By selling both calls and puts, we collected a total of $2000 for 20 contracts just like previous months. Our maximum profit for June is $2000  which we will get if XJO is trading between 4925 and 5725 when these options expire on 19 June 2014. XJO was trading at around 5462 when the trade was opened on May 9.

As our maximum profit is $2000, our maximum loss should be limited to $14,000 (7 x $2000). After putting on the trade, I put in stop loss orders to buy back our short options if either of them ever reached the price of 80 points. If the stop loss gets triggered, we would be buying 20 contracts back for $16,000. After deducting the $2000 we have already collected, we would have a loss of $14,000 (not including commissions). By not having to buy the insurance options, we were able to sell options that were further OTM compared to the iron condor trades. Our strangle is 800 points wide (5725 – 4925) which is much wider than our iron condors. From the probability chart taken when the trade was opened, there is a 98.03% chance that our puts and a 91.66% chance that our calls would expire worthless. Both options have a higher chance of expiring worthless compared to the options in our iron condors in previous months.

By looking at the options chains below which was taken when the trade was opened on May 9, we can see that the ATM options for June (6 weeks to expiry) were trading at around 80 points which is our stop loss price. The ATM options for May (1 week to expiry) were trading for far less thanks to the magic of time decay. This means our stop losses will not be triggered even if our sold options become ATM or slightly ITM as long as this does not happen too soon (and volatility does not spike).

There is so much to like about this trade – we have a wider profit range and higher probabilities of expiring OTM. We only need to pay half the brokerage compared to our iron condors if the trade expires worthless as expected. The only down side is the margin required. The margin required by my broker when I opened this trade was around $77,000. As I had over $100,000 in our paper trading account, I could put on this trade. I am aware that if we were trading with $40,000 account, we would not be able to do this trade. I wanted to put on this trade just once for educational purpose. Without the insurance options, brokers see this as a very risky trade and hence require a big margin. Margins would also increase if XJO moves closer to the strike price of our sold options and we risk getting a margin call even before hitting our stop loss.

I will provide another update after the June trade expires on June 19. If there are any readers out there who are trading XJO iron condors or strangles, I would like to hear from you. Please share your experience by leaving a comment or sending me an email. Thank you to all who have done so already.

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.

4 Responses to XJO Iron Condors May Update

  1. Bruce Lanyon says:

    Christina, great to see your practical example. Not too many other sources available for an Australian IC. What is the platform you are using for the price and probability data?

    • Christina says:

      Hi Bruce,
      I am trading on the Trader Workstation (TWS) platform from Interactive Brokers (IB). The probability data is from their new Probability Lab tool.

  2. Jason says:

    Hi Christina,

    Thank you for sharing with us your AP IC trading. Could you please indicate the margin requirement for 1 AP strangle in your example? I think it is important to compare the ROI for different strategies as well.

    • Christina says:

      Hi Jason
      I am not sure if I understand your question. As mentioned in my article, the initial margin requirement by my broker was $77,000 was for 20 contracts. So this would be $3850 per contract.

      However, this margin changes daily. Yesterday (AP at 5382 and 1 day to expiry) the margin required was roughly $60,000. It is hard to measure ROI with strangles as the margin required is not fixed.

      Christina

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