Note to new readers: This is a regular update on the status of our XJO Iron Condor (Mark II) Model Portfolio. Please read the Trading Plan  first in order to understand the objectives and the rules for trading this model portfolio.

February was one of those months when I ask myself “why don’t I just buy bank shares and Telstra shares and head to the beach?” instead of doing non-directional trades like iron condors! The downtrend/correction that began in September 2014 ended when the European Central Bank announced a trillion euro QE program on Jan 21. The RBA rate cut on Feb 4 provided more fuel for the rally. The 600 point “melt-up” over 4 weeks made the 500 point “melt-down” over 7 weeks in September/October last year look rather tame in comparison as shown in the chart below.

We had two iron condor trades on in February. The XJO settlement price was 5944.1 upon options expiry on February 19.  As this is well above the long strike both our February call spreads (at 5625/5725 and 5675/5775), both call spreads finished at maximum loss.

February certainly gave our adjustment strategy a good test. I was able to roll up the put spreads (the untested side) a couple of times to collect more income according to our Trading Plan. On 27 Jan, I rolled up the 4900/4800 put spread up to 5250/5150 when the delta of the tested 5625/5725 call spread hit 30. On 3 Feb, I rolled the 5250/5150 put spread up again to 5625/5525 to convert to an iron butterfly when XJO went above the 5725 long call. I was able to collect another 20 points from selling these two put spreads to reduce the max loss for this iron condor from 87 to 67 points per contract.

I did not roll up the 4950/4850 put spreads when the delta of tested call 5675/5775 spread hit 30 as there was less than 30 DTE when that it happened. I still felt pretty confident at the time that the 5650 short-term resistance level would hold. When that was proved wrong, I converted this iron condor into an iron butterfly by rolling the put spread up to 5675/5575 on 5 Feb. I managed to collect another 14 points to reduce the max loss of this iron condor from 88 to 74 points per contract. Our performance for the XJO Iron Condor (Mark II) portfolio as at February 2015 is -$6,465.

Although this was a losing month, we followed our Trading Plan and were able to reduce our maximum loss using our adjustment strategy. One bad month does not mean the trading system is broken. A 600 point melt-up on the ASX200 is an outlier move – I don’t think I have seen anything like this before, since I started trading on the ASX in 2007. Although we did manage to keep our maximum loss to 3x credit collected, I wish I had tried to reduce the maximum loss of the second iron condor to 70 points or less by closing the trade earlier perhaps. I will try to do this in our future trades.

On 16 Jan (day after January expiry), I put on a partial position for our March iron condor. IV rank was pretty high at 61% at the time so I thought it would be a good time to put on a trade even though we still had 62 DTE which is longer than our preferred duration of 30-56 DTE as per the Trading Plan. I sold 6 contracts of the 5600/5700 call spread and 4700/4600 put spread. With the high IV, we were able to get a nice wide iron condor which could have coped with a 600 point melt-down but we got a melt-up instead! Luckily, I only allocated 30% of our capital to this trade as the monster rally in XJO commenced almost immediately after I placed this trade! With XJO over 300 points above our short strike, this trade is also not looking too good at this time but I will provide a full update after the March expiry.

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.

3 Responses to XJO IC (Mark II) February Update

  1. Jim says:

    Thanks for the great post Christina. I also found my condors difficult to manage with my trading system rules as the market was “falling up”, and suffered significant losses. I thought that markets were only supposed to crash downwards, not up! I guess it just proves the words of Mark Douglas in his book Trading in the Zone, in the markets “anything can happen”. As you say it doesn’t mean the trading system is broken, however I am looking at some strategies to reduce losses when outlier moves like this occur.

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