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.

May was a winning month for our iron condor model portfolio. The XJO settlement price for May was 5625.4 so all our May options (6225/6425 calls and 5575/5375 put) expired worthless and we got to keep the $600 premium that we collected for this trade. The performance of the XJO Iron Condor (Mark II) portfolio as at May 2015 is -$10,185.

Although we had a winning month, May was not an easy month for trading iron condors as IV rose sharply after we opened our May trade on April 10. This is NOT good for short premium trades like the Iron Condor as explained in my May Update for our Iron Butterfly Model Portfolio. XJO also fell hard in the last week before expiry and our 5575 short put briefly went ITM one day before expiry! Holding a trade until expiry exposes us to expiry risk. Gamma (the rate of change in delta) increases dramatically in the two weeks before expiry causing ATM option prices to swing wildly as shown in the chart below:

I mentioned in my April Update that I would look into changing our trading strategy to manage winners at 50%. One of the main reasons for closing a trade early is to reduce expiry risk. With our RBA meetings occurring within 1-2 weeks before expiry, we have even more incentive to be out of our trades two weeks before expiry. Tasty trade research has shown that managing winners of 45 day trades at 50% reduced the average holding time from 45 days to 26 days i.e. most trades will be closed two weeks before expiry. The winning percentage also increases from 84% to 90% as shown in the chart below.

Source: Tasty Trade Core Components video

Two of the objectives of our XJO Iron Condor Model Portfolio are 1) to achieve an average return of 10% per month and 2) to have a 85-90% win rate. We have been able to collect 10% by selling options at 10 delta which have a 90% probability of expiring OTM.  I found that by selling options at 16-20 delta (roughly 80-84% probability OTM) we could collect double the premium compared to what we can get at 10 delta. If we sell these options and manage our trades at 50%, we should still be able to achieve our target profit of 10% per month. We should also be able to maintain a win rate of 85-90% as the win rate is higher compared to holding to expiry. Hopefully we can achieve our objectives in a shorter amount of time. We have been able to do this in our Iron Butterfly model portfolio. Tasty Trade has also done similar studies which show that this is possible (see Equivalent Targets | Less Time).

I have also found managing trades based on delta as per our original trading plan too difficult to implement as a retail trader who is unable to watch the market full-time. For example, I did not have time to manage our May trades as we had a death in the family and travel plans in May.

Closing 45 day trades two weeks before expiry would also mean we will not have overlapping trades so an outlier move like the one we had in February will only affect one month instead of two. We will amend our Trading Plan and start implementing our new iron condor strategy in June.

I opened our June trade on May 6 with 43 DTE. IV rank was 76% so I could allocate up to 45% of our capital as per our Trading Plan. I sold 4 contracts of the 5975/6175 call spread and 5400/5200 put spread for a total of 41 points per contract or $1640 for our iron condor. This is a 20% return on a 200 point wide spread. We will close this trade when we are able to realise 50% of the maximum profit. This will be done automatically by setting a Good-Till-Cancelled (GTC) order to buy back our iron condor for 20 points per contract.

Note: The GTC order was filled this morning only after 16 days!  I will write more about this trade in my June update.

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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