We started trading our second XJO Iron Condor Model Portfolio in January 2015. Our Trading Plan for this model portfolio was more complex than our first XJO iron condor model portfolio and included:

  • Active management of losing trades
  • Scaling position size by Implied Volatility (IV) Rank

After trading this model portfolio for a few months, I found the trading plan to be a little too complicated to follow especially when the market was moving very quickly like it did in February. Although we managed to reduce our max loss through active trade management, rolling the winning side was also not really worthwhile as the additional premium was not enough to justify to additional risk and commissions. Scaling position size based on IV rank also made it very hard to recover our losses, if we have a losing month with a large position size.

For the second half of 2015, I would like to run a third XJO iron condor model portfolio (we will call it the Mark III portfolio) using what we have learned from running the last two model portfolios and from the iron condor studies done by DTR Trading on SPX (see June 2015 update for details).  Of the 128 iron condor variations tested, the best performing was the 20 delta iron condor with 38 DTE, managed at 50% profit with no stop losses (see purple line in chart below). However, this trading strategy could incur big drawdowns, similar to what we experienced in our first model portfolio (see Oct 2014 update). If we have the bad luck of running into a couple of losing months when we start trading (like what happened to us in the Mark II portfolio), it could wipe out our trading capital, and also our trading confidence! Hence, I prefer to have a stop loss to preserve trading capital especially at the beginning. The trading strategy which uses a stop loss of 100% (see blue dotted line) also performed well but has much smaller drawdowns so it might be the better one to start with.

Source: DTR Trading

My profit target for the Mark III portfolio is 15-20% of our total capital per year. The DTR studies (which do not include commissions) show a 500% return after 8.3 years. If we allocate 50% of our capital to each trade, then our returns would be 250% in the same period or around 30% per year. If we are able to achieve similar results as what was obtained for SPX, we should be able to achieve or exceed our profit target after factoring in commissions. We will trade this third model portfolio using a trading capital of $20,000.

All the trades in the DTR studies were closed at or before 8 DTE. We will also close any open trades 1 week before expiry to avoid the gamma risk. As we are managing winning trades at 50%, hopefully most of our trades should be closed well before then. The DTR studies do not take into account Implied Volatility. We know from studies done by Tasty Trade that iron condors are less risky and more profitable in high IV, so we will look at IV rank and only place a trade if IV Rank is greater than 30%.

The above is summarised in the Trading Plan for the Mark III portfolio. This trading strategy is only slightly more complex than what we used for our first XJO Iron Condor model portfolio. Although not a fully “set and forget” strategy like our first model portfolio, it is still a fairly mechanical strategy which will not require much management.

I opened the first trade for our Mark III portfolio, a July’15 iron condor, on 5 June 2015 which was 41 DTE. XJO was trading at 5500 and IV Rank was 90% that day. Based on a delta of 20 for the short puts and calls, we sold the 5225/5025 put spread and 5775/5975 call spread for 41 points per contract. Using a 50% capital allocation, we sold 5 contracts and collected $2050 for this trade. I set up a GTC order to automatically close this trade at 20 points (i.e. 50% of max profit) and this order was filled on 26 June 2015, 21 days after we opened our trade. Our performance after the first month is a profit is $1050.

The Aug’15 iron condor was opened on 13 July 2015 which was 38 DTE. XJO was trading at 5525 and IV Rank was 84% that day. Based on a delta of 20 for the short puts and calls, we sold the 5250/5050 put spread and 5750/5950 call spread for 48 points per contract. I will provide a monthly update for this XJO Iron Condor (Mark III) model portfolio. Our next update will be in August 2015.

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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