Thanks to the extensive back testing done by DTR Trading, we can see that there are many strategy variations of mechanically traded iron condors that are profitable. The top 20 strategies in terms of profit per trade (based on a 10 year study done using SPX) are shown in the table below (click to enlarge).

Table 1: Top 20 SPX Iron Condors based on Average P&L per Trade

Table 1 - Top 20 SPX IC strategy variations

Source: DTR Trading

Profit per trade is only one factor in calculating expected portfolio returns. The other more important factor is position size. For example, if your average profit per trade is 5.9% and your position size is 100% of your capital, then your expected portfolio returns (assuming you can make 12 such trades per year) would be

5.9% x 1 x 12 =  70.8% per year

However, we cannot allocate 100% of our capital to each trade for many reasons. We need to reserve some capital for:

  1. Covering losing trades. If we pick a strategy with an expected winning percentage of 80%, we should expect 20% of our trades to be losers. Depending on the loss threshold of our chosen strategy, we need to set aside a enough capital to cover those losing trades.
  2. Future trades. If we pick a strategy with 66 DTE, our capital could be tied up for 2 months. If we wish to place a trade every month, we have to reduce our position size to allow us to have capital to start new trade before the previous month’s trade is closed.

Although all the above iron condor strategies can be traded successfully, many traders will lose money if they are not traded with the right position size. So what is the right position size? The answer depends on the strategy that you choose. Let’s go through 3 different strategy variations.

38 DTE, 20 Delta with loss threshold of 400% (red box in Table 1)

The expected winning percentage for this strategy is 86% so we should expect 1-2 losing trades per year. To be on the safe side, we should reserve enough capital for 3 consecutive losing trades. The loss threshold is 400% of premium collected so we need to set aside a lot of capital to cover for losing trades. The average days in trade is 21 days and the maximum days in trade would be 30 as all trades are closed 8 days before expiry. If we are trading monthly options, then we should be able to reuse our capital every month. A reasonable position size for this strategy would then be 25% of total capital as this would enable us to weather up to 3 consecutive losing months. The expected portfolio returns using this position size would be:

5.9% x 0.25 x 12 = 17.7%

80 DTE, 12 Delta with no loss threshold (see blue box in Table 1)

The expected winning percentage for this strategy is 80% so we should expect 2-3 losing trades per year. To be on the safe side, we should reserve enough capital for 4 consecutive losing trades. As there is no  loss threshold,  the max loss is equal to the max risk. The average days in trade is 64 days and the maximum days in trade would be 72 as all trades are closed 8 days before expiry. If we are trading monthly options, then capital for each trade will be tied up for 3 months. A reasonable position size for this strategy would then be 15% of total capital as this would enable us have enough capital to put on a new trade every month and to weather up to 4 consecutive losing months. The expected portfolio returns using this position size would be:

5.5% x 0.15 x 12 = 9.9%

38 DTE, 20 Delta with loss threshold of 100% (green box in Table 1)

The expected winning percentage for this strategy is 79% so we should expect 2-3 losing trades per year. To be on the safe side, we should reserve enough capital for 4 consecutive losing trades. As the loss threshold is only 100% of premium collected, we do not need to set aside a lot of capital to cover losing trades. The average days in trade is 19 days and the maximum days in trade would be 30 as all trades are closed 8 days before expiry If we are trading monthly options, then we should be able to recycle our capital every month. A reasonable position size for this strategy would then be 50% of total capital as this would enable us have enough capital to put on a new trade every month and to weather up to 4-5 consecutive losing months. The expected portfolio returns using this position size would be:

5.2% x 0.5 x 12 = 31.2%

From the above examples, you can see that the highest profit per trade may not always result in the highest total portfolio returns, if they are traded with a conservative position size to suit the strategy. Many new iron condor traders tend to trade with position sizes that are too big. As I mentioned many times before, the key to successfully trading non-directional strategies such as the iron condor is risk and money management.

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