I started our first XJO iron condor model portfolio at the end of 2013 in response to a reader’s request. While there is plenty of information on trading iron condors using US index options such as SPX or RUT, there was hardly any information on trading this strategy using ASX index options such as XJO. I have traded iron condors on US indexes and ETFs before but I had not tried trading them using ASX products as I did not think it was viable to do these strategies due to the high brokerage cost for option trades in Australia. This strategy is very brokerage intensive as it has 4 “legs” and therefore brokerage costs will have an impact.

I had also been contacted by a number of readers who were interested in option income strategies but did not have enough capital to trade strategies like covered calls. Generally, this group of people also did not have the time or skill to do stock analysis and prefered a trading system which did not rely on picking the right stocks in order to succeed.  As they also typically have full time jobs, they would also prefered a “set and forget” strategy as they have little time during the day to monitor and adjust their trades. I thought the iron condor strategy might be a good fit for this group of traders.

With all the above constraints in mind, I came up with a very simple trading plan for our first XJO Iron Condor Model portfolio to suit our target group. Some key elements of this plan include (see setup post for more details):

  • Selling iron condors mechanically every month. We always sell options with 90% probability of expiring OTM.
  • Holding the trade until expiry to save on brokerage. This way we only need to pay brokerage once, when we open the trade.
  • No active trade management e.g. rolling positions after trade is opened. We assume our trader does not have the time or skill to do these adjustments. Rolling trades will also incur additional brokerage as you have to close the old positions and open new ones.

I thought it would also be interesting to benchmark the performance of our model portfolio with a professional iron condor advisory service such as 10ppm.com.  The target return for this service is 10 percent per month. Over the past 12 months we have been tracking our performance monthly in a similar fashion to this advisory service. The gross return (before fees and commissions) in 2014 for both portfolios is shown in the table below:

The capital allocated for trading each month was $20,000 for both portfolios and the gross returns for the year were 11% and 34% respectively. 10ppm.com clearly outperforms when we look at these numbers. However, to get our real bottom line, we need to deduct the costs which would include brokerage and fees. Let’s look into the details of their trades in order to get an idea of the brokerage incurred each month. Below are their trades in October:

Source: 10ppm.com

We can see that they trade 4 products – SPY, IWM, DIA and RUT. If the $20K capital was equally allocated across the 4 products (i.e. $5K per position), this would mean 25 contracts for 2 point spreads (on SPY, IWM and DIA) and 10 contracts for 5 point spreads (on RUT). A credit spread on SPY would involve 50 contracts (25 x 2 legs) and an iron condor would involve 100 contracts (25 x 4 legs). This would mean that just opening iron condors for all 4 products would involve 340 contracts (100 contracts for SPY, IWM and DIA and 40 contracts for RUT).

From their October trade, we see that 10ppm practise “rolling” their spreads when they get tested. For 2 point spreads, this would involve closing 50 contracts of the old trade and opening 50 more contracts at the new strike price. They also use stop losses and this would involve closing 50 contracts. Assuming equal allocation of capital to all 4 products, I calculated that they would have traded 610 contracts that month. Of course October was an extreme month and not representative of a typical month. If we use an average of 400 contracts a month and $1 per contract of brokerage for 10ppm, and include 10ppm’s trading advisory fee of $125 per month, the following would be the net profit for both portfolios:

The above is to just demonstrate the impact of brokerage on profit with trading strategies such as iron condors. We paid $2 per contract for trading XJO options. At this brokerage rate, we cannot trade 10ppm’s strategy as we would very likely end up with a net loss after deducting brokerage costs.

Once the costs have been factored in, the performance for both portfolios is very underwhelming in 2014. Does that mean that iron condors are not a good income strategy or was 2014 just not a good year for iron condors? To get a better idea of average performance, we need to look at the results over a longer period of time. The 8 year performance data from the 10ppm website is shown in the table below:

2014 was definitely not one of their best years. In their best year (2009) their annual return was 128%. Their average profit per trade is 5% and of their trades 81% were winning trades (winning percentage). Bear in mind this does not include costs so the net profit per trade will reduce.

A ten year study on trading SPX iron condors using a mechanical “set and forget” iron condor strategy (similar to what we used in our XJO Model Portfolio), showed that the average profit per trade (after brokerage) is 4.14% and the winning percentage is 88% (more details on this study can be found in our October update).

Although less than 10 percent per month, the above returns are still pretty good. With term deposits rates of under 4% per year, a similar return in a month sounds almost too good to be true! However, we must remember that the risks in the iron condor strategy are very much higher than term deposits! Given that we can get large draw-downs with this income strategy, we cannot allocate a 100% of our available capital every month (as we can with term deposits) as one or two bad months can wipe us out. In 2010, there were 3 consecutive losing months in the 10ppm portfolio. If someone had started trading with only $20K in March 2010, they would have lost all their capital three months later. As I have mentioned many times before, the key to success in trading the iron condor strategy is in proper risk and money management.

The actual return on total capital will depend on your money management rules. Trading position sizes that are too big is the most common problem that new traders get into. In our model portfolio, we allocated 50% of our total capital into each month, which is a fairly high allocation as our assumed risk profile is someone who is willing to take more risk to get a bigger return. With this allocation, our expected long term average return on capital per year would be around 24% (4% per trade x 12 trades x 50% capital per trade). If we use a more conservative allocation of 15% per trade, then our expected returns will be a lot lower at around 7.2% (4% per trade x 12 trades x 15% capital per trade). Our net profit of $780 (or 1.95%) this year is far short of our expected 24% per year. This is because the returns can vary a lot from year to year, as you can see from the 8 year performance data from the 10ppm show above. In a good year like 2009, 10ppm was up 128% but in a bad year like 2010, they were down 42%.

In our model portfolio we put on trades of the same size every month. Research has shown that short premium strategies like the iron condor do better when they are opened when implied volatility (IV) is high. In fact opening a trade when the IV is low is quite risky as the width of the iron condor would be narrow and the trade will quickly get into trouble when there is a big move in the market, as evidenced by our August trade. IV fell to a multi-year low of 8.84 in July 2014 and our August iron condor was only 400 points wide. Most experienced iron condor traders will scale their position sizes based on IV (i.e. reduce position size when IV is low) but we did not take IV into consideration in the trading plan for this model portfolio.

In November I discussed the concept of IV rank i.e. assigning a rank based on where IV is relative to when it has been in the past 52 weeks (see November update for more details). I also back tested what our results would have been if we had scaled the position size in our model portfolio by IV rank based on the following rules:

  • 15% of capital when IV rank is 25% or less
  • 30% of capital when IV rank is 26-50% and
  • 50% of capital only when IV rank is higher than 50%,

Our annual return (after brokerage) would have improved from 1.95% to 10.65% as shown below (click to enlarge):

If we chose to only trade in the months when the IV rank was higher than 25%, all our trades would have been winners and our annual return (after brokerage) would have been 14.4% as shown below (click to enlarge):


2014 was not a great year for trading iron condors. While I still believe the simple mechanical way of trading iron condors that we did in our first XJO iron condor model portfolio can achieve good results over time, as shown in the 10 year SPX iron condor study, it probably will not be suitable for a new iron condor trader who is trading on his own. Holding a trade to expiry can be pretty tough especially when one of the short strikes go ITM as your account will be showing large unrealised losses when that happens. This can easily cause a new trader to panic and close out trades that eventually turn out to be winners. It is very hard to sit tight and do nothing when your trade goes against you. Even with many winning months, many new traders will throw in the towel after hitting a big losing month like we did in October 2014. I remember being too scared to trade iron condors for months after my trades hit maximum loss in October 2008 as I was psychologically scarred by that loss. If I had continued trading, I probably would have had a very good year in 2009 as did 10ppm.

For our next XJO iron condor model portfolio, we will incorporate some of the ideas that we have learned while running the first XJO iron condor model portfolio in 2014. We will refine our risk and money management strategies based on research done by Tasty Trade and suggestions from other experienced iron condor traders who were kind enough to share their knowledge with me.  Some of the ideas include:

  • Scaling position size based on IV rank
  • Applying active risk management strategies such as managing our winning trades and making adjustments to minimise loss

I will provide a detailed trading plan in the setup post for our XJO Iron Condor (Mark II) Model Portfolio in January 2015.

Wishing everyone a Happy and Prosperous 2015!

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