Note to new readers: This is a regular update on the status of our XJO Iron Condor (Mark III) Model Portfolio. Please read the Trading Plan first in order to understand the objectives and the rules for trading this model portfolio.
With the huge correction in the past weeks, it should be no surprise that our September iron condor was a losing trade. We reached our stop loss target of 100% of credit collected on 21 August, 14 days after we opened our trade. The loss for our 5 contract trade was $1900. The performance of the XJO Iron Condor (Mark III) portfolio as at September 2015 is $350.
We opened our September iron condor (a 5750/5950 call spread and a 5250/5050 put spread) on 6 August when XJO was trading at around 5600. IV Rank was 67% when we opened the trade. We reached our stop loss on 21 August when XJO was trading at around 5200. Although that was only a 400 point move, the option prices increased a lot quicker due to the rising IV as shown in the chart of XVI below. When we opened our trade, XVI was at 16 but it was at 21 (about 30% higher) when we closed the trade. It was a good thing we closed the trade then as IV continued to spike to a high of 33 two days later. That is a 100% increase from when we opened our trade and our unrealized losses would have been pretty large had we not closed the trade! Closing spread trades is also quite difficult when the market is moving quickly. I had trouble closing a put spread on 24 August (when XJO fell 200 points) and ended up having to close each leg separately.
Although taking a loss is never fun, I definitely feel more comfortable taking a smaller loss rather than hanging on to large losing positions like what we did when trading our first XJO Model Portfolio. Although research has shown that managing winners at 50% without any stop loss (see purple line in chart below) produces the highest profit over the long term, it is psychologically very hard to take a big loss. If we did not close our September trade, it could well turn out to be a winning month if the market rebound continues in the next two weeks. However, if it doesn’t, we could end up with a big loss. If you get a couple of big losing months in a row (like what we experienced in our Mark II model portfolio), we could run out of capital to continue trading. That is why we decided to set a stop loss at 100% of credit received in our Trading Plan for the Mark III Model Portfolio.
As usual, we will open our October trade after the RBA meeting in September. Hopefully, the market volatility will have settled a little by then but IV will still remain high enough for us to collect decent premium. I will provide another update after we close the October trade.
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.