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.
Another month has passed and it is time for another update on our XJO iron condor model portfolio. October was not a good month for our iron condor. The XJO settlement price was 5196.1 upon options expiry on October 16. As this is below our 5200 long put, this means that our October iron condor expired at maximum loss, which is $18,300 before commissions.
So far we have had 9 winning months and 1 losing month, resulting is a year-to-date loss of $1340 as shown in the table below. We track our performance in a similar manner as 10percentpermonth.com, who do not include commissions as this will vary from broker to broker.
The big loss this month is a sober reminder that draw downs are part of trading the iron condor strategy. After 9 winning months in a row, we can forget that not every month will be a winner. Psychologically, it is hard to take a big loss and a new trader would be tempted to try to avoid taking losses, or feel afraid to put on a new trade after a bad month like this one. Perhaps it would help to put a little perspective on what has happened since we opened our October trade on 5th September. The Australian market has been hit with a string of bad news – iron ore fell to 5 year lows, crude oil prices fell to 4 year lows, growth is negative in Europe, to name a few. Every attempt for a rebound rally was halted by another wave of selling. Our mining companies have taken big hits from falling commodity prices and foreign investors are fleeing the Australian market as the Australian stock prices and dollar fell. As at Friday Oct 10, the Australian market has been down for 7 consecutive weeks, something that has been observed to have happened only 6 times since 1980 by ProbabilityTrader.com. The last time this happened was in July 2008. Our October trade happened to catch almost all of the 7 down weeks as shown in the chart below.
So far our winning percentage is as we expected (90% winners) but the P&L is not as healthy as we would like. We target to get a 10% Return on Capital (ROC) per trade but we know not every trade will be a winning trade. To get a better idea of what average ROC to expect if we include losing trades, we really need more data. Fortunately for us, the folks at Tasty Trade recently did a 10 year study on selling strangles and iron condors on the SPX that are very similar to what we have been doing in this model portfolio (i.e. 45 day duration, short strikes at 90% probability OTM, no management and held until expiry). The study period (2005 to 2014) included the Global Financial Crisis when the SPX fell nearly 50%.
Source: Tasty Trade ROC: Strangle Replacement video
From the 114 trades in their study, the winning percentage is 88% and the average ROC is 4.14% per trade over this ten year period. The overall ROC per year will depend on how much capital you allocate to each trade. As each trade will tie up capital for 45 days, the most you can allocate to each trade would be 50% of your trading capital. As we can see from this month’s loss, it is probably not a good idea to allocate too much of your capital per trade as a big loss in the first few months of trading this strategy could prevent you from continuing to trade with the same position size as you will not have sufficient capital to cover margins. The key to successfully trading this iron condor strategy is to have a good risk and money management plan.
On Oct 10, we opened our November trade, six weeks before expiry as per our normal schedule. We used the Probability Chart to choose the strike prices for our short options with close to 90% OTM probability.
We sold 4850/4650 put spreads for 13 points and 5475/5675 call spreads for 9 points. By selling 10 contracts of both call and put spreads, we collected a total of $2200. The total margin required for this iron condor is $17,800. Our maximum profit for November is $2,200 which we will get if XJO is trading between 4850 and 5475 when these options expire on November 20. XJO was trading at around 5200 when the trade was opened on Oct 10. The width of our November iron condor is 625 points (5475 – 4850), which is much wider than our October iron condor which was only 450 points wide. With the higher volatility, we can get wider condors and higher premium.
In our iron condor model portfolio, we hold our trade to expiry. However, a number of traders have observed that the OPIC (XJO settlement price) is often very different from the XJO opening price on expiry day as shown in the table below.
Our August 5675 calls became ITM because the OPIC came in so much higher than the XJO opening price. Based on the XJO opening price, our calls would have expired worthless. This month, the OPIC is nearly 50 points below the opening price. Based on the XJO Opening Price, we would not have hit maximum loss this month. As the OPIC is quite unpredictable and does not accurately reflect the price of XJO, I prefer to close my trades at least 1 day before expiry in my personal account.
I will provide another update after the November trade expires on November 20. For those who are interested in learning to trade this iron condor strategy, I have recently created training videos for trading this strategy. These training videos are available on our member website.
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.