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.
March was another losing month for our iron condor model portfolio. Our March trade which was opened on Jan 16, was affected by the February “melt up”, just like our February trades. Whenever we have a losing trade, we should analyse it to see what we can learn from it. Did we follow our trading plan? If so, does our trading plan need to be modified? Some key milestones in the trade are shown on the chart below.
I opened the trade on Jan 16, one day after Jan expiry. This was 62 days DTE which is longer than the 30-56 DTE specified in our trading plan. IV Rank was high that day so I thought it would be a good time to put on a partial position. The market reversed direction almost immediately and two weeks later, the delta of our short call reached 30 so on Jan 30, I rolled our put spread up as per our trading plan. On Feb 3, XJO shot up after the RBA announced the interest rate cut and our short calls became over 100 points ITM. According to our trading plan, I should have rolled the put spreads again to convert to an iron butterfly but I did not as the market had already rallied 400 points in two weeks, hence I thought a pullback was likely to happen soon. A number of high yield stocks like TLS and CBA were due to trade ex-dividend in late Feb and the market normally pulls back after stocks go ex-dividend. The pullback did happen, but it was later and shallower than expected and I never got another chance to convert to an iron butterfly for decent premium like I did with the February trades. I only managed to collect 17 points per contract for our March Iron Condor so our maximum loss was 83 points per contract. As we had a position size of 6 contracts, this resulted in a loss of $4980. The performance of the XJO Iron Condor (Mark II) portfolio as at March 2015 is -$11,445.
In hind sight, we would have been better off if I had followed our Trading Plan. I could have easily collected another 20 points or more to help reduce our losses had I converted the trade to an iron butterfly on Feb 3, just like I did with our February trade. I certainly did not manage the March trade as well as I did the February trades. I guess I was too busy managing the February trades when they got into trouble. I probably had too many XJO positions open at a time. I had two Feb iron condors, one March iron condor and one March Iron Butterfly on at the same time and it was hard to keep on top of all of them. I also looked to close the call spread before expiry for a smaller loss but I found this hard to do as the market can do a U turn just after you take a loss. I prefer to let the probabilities play out. We must not forget that the options we sell in our iron condor trade have a 90% probability of expiring OTM.
With the RBA actively cutting interest rates again, we have learned that the market tends to make big moves after RBA announcements. Hence, it would be better to wait until after RBA meetings on the first Tuesday of the month before opening new trades. This way, if we have another melt-up or melt-down, only one month’s trade will be affected instead of two. I opened our April trade on Mar 6 (after the March RBA meeting) with 41 DTE. IV rank has fallen to 32% so I allocated 30% of our capital (or $6000) as per our Trading Plan. I sold 6 contracts of the 6150/6250 call spread and 5450/5350 put spread for a total of 11 points per contract.
Unlike our first iron condor model portfolio where our first drawdown happened after 10 profitable months, the drawdowns in this second model portfolio have happened in the first two months of trading. In our first model portfolio, the drawdown only affected our profits but this time it has reduced our trading capital from $20,000 to around $9000 after including commissions. Ideally, we should be able to top up our capital (if required) so we can continue to trade with the same position sizes as before. For our model portfolio we shall assume we are able to do this.
If we are unable to top up capital, we may not have sufficient capital to cover the margins for iron condor trades for two months concurrently. If we do not have sufficient capital to cover margins, we may have to wait for one month’s trade to expire before putting on the next month’s trade. Closing a trade early will also release margin requirements and make the capital available to cover the margin for the next month’s trade. Tasty trade has done a lot of research that has shown “managing winners at 50%” is a winning strategy. Managing winners at 50% mean closing a trade when it achieves 50% of max profit. With huge moves happening AFTER Reserve Bank announcements, it might not be a bad idea to close an open trade that is profitable BEFORE the announcement to avoid winners turning into losers.
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.