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.

December was a good month for our iron condor. All the options in our December iron condor expired worthless and we got to keep the option premium of $1400 before commissions. The XJO settlement price was around 5190.6 upon options expiry on December 18.

So far we have had 11 winning months and 1 losing month resulting in a year-to-date gain of $2260 as shown in the table below. We track our performance in a similar manner as 10ppm.com, who do not include commissions as this will vary from broker to broker.

Although we had a winning month, it certainly was not a stress free trade! XJO was trading right around our short put strike of 5150 just a few days before expiry. With global oil prices in free fall, there was a lot of volatility and we could have easily gone 60 points down instead of up on expiry day. After our big loss in October, I have been looking at loss minimization strategies should our short strike become ITM close to expiry.

One option of course is to close our trade early, but that would involve taking a loss as there is still a lot time value in ATM options. Below is the XJO option chain when XJO was trading right at our short strike of 5150 on Tuesday, 16 Dec:

Source: Interactive Broker Trader Work Station

We would have to pay 30 points to buy back our 5150 put, even though the intrinsic value of this option is zero. There is a 50-50 chance that XJO could go up and we may not have to take any loss, hence this is not a very appealing option.

My preferred option would be to aggressively roll down our call spread and try to pick up some extra premium to reduce our losses should XJO continue to go down.  You can still get around 10 points for a 5200/5400 call spread, even with effectively only 1 day to expiry. Or if we are really bearish, we could roll right down to the short strike of our put spread, effectively turning our iron condor trade into an iron butterfly. We will collect more premium to widen our breakeven on the put side and reduce our maximum loss. However, our profit zone will be reduced and we could end up with a losing trade if XJO rebounds and goes above the breakeven on the call side. The risk graphs for the Iron Condor and the Iron Butterfly are shown in the chart below:

In a study on SPY iron condors, it was found that converting to an iron butterfly whenever the short strike of the iron condor is ITM by one dollar increased the overall profit even though it reduced the winning percentage as shown in the chart below:

Source: Tasty Trade To fly or Not to Fly video

This adjustment is not so easy to implement mechanically, but it is a simple action that can be taken to defend a losing position, if you wish to do something. As one iron condor newbie trader told me “I just hate to be a sitting duck when my option goes ITM”

We will finish up our first XJO iron condor model portfolio this month. I will provide a final performance update next week and look at how we fared compared to a professionally managed iron condor service such as 10ppm.com, and what our profit/loss would look like if we had scaled our trades by IV rank as discussed in our November update. We will also look at some lessons learned and how we can improve our strategy.

For next year, I thought it would be interesting to run a XJO Iron Butterfly model portfolio. Butterflies are another popular non-directional options income strategy. The probability of profit for this strategy is lower but the risk/ reward for this strategy is a lot less scary compared to the Iron Condor. For those who cannot handle the stress of frequently seeing unrealised losses in your trading account, this strategy might suit you better.

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.

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