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.

Our January 2016 iron condor was an interesting trade, from which there were many lessons to be learned. Two trades were opened on 2 December, one day after the December RBA meeting when XJO was trading around 5250. At the time, the market sentiment was pretty bullish so IV was down. XVI was trading at 16.61 which translated to an IV Rank of 23%. According to the Trading Plan for our Mark III model portfolio, we should not put on a trade if IV Rank is less than 30%. I was also a little worried about the upcoming US Fed meeting and the highly anticipated “first time in a decade” interest rate rise which had caused some ugly market action back in August. However, as I had a mentoring session scheduled on that day, I was keen to put on a trade so I convinced myself that an IV of 16 was not that low and the usual Santa rally will balance out any bearishness from the US.

XJO chart as at 31 Dec 2015

As you can see from the chart above, the market turned bearish immediately after we opened our trade. Things got ugly on 14 December when XJO crashed below 5000 (also the strike price of our short put), the support level I had expected would hold as it did in November. I decided to close my trade for a loss, even though the loss had not reached our loss threshold of 100% of premium collected. That week was a busy time for me and I knew I did not have the time to watch the market closely. It is also very difficult to enjoy your preparations for Christmas when the market is crashing and your short put is in the money, so I preferred to take a small loss.

The second iron condor (same strike prices) was traded by one of my mentees who decided to keep his trade open as it had not reached the loss threshold and he was able to monitor his trade closely. The loss threshold was almost breached by the end of the next day. He was ready to close the trade for a loss the following day when the market suddenly rebounded. His iron condor went back into the profit zone and was automatically closed on 24 December 2015 (22 days after trade was opened) when it reached the profit target of 50% of credit collected.

I was not sure what to put in our performance tracker as we had one losing trade and one winning trade. I think the fairest way would be to exclude this month’s trade from our performance tracker. Strictly speaking, had we followed our Trading Plan, we would not have put on a trade when IV Rank was 23%. Without including the January trade, the performance as of January 2016 remains at a total profit of $3750 or a 19% return on our trading capital of $20,000 .

XJO IC Performance as at Jan 2016

So what are some of the lessons learned?

For a start, when you expect high volatility because of an impending event, it may be best to stay out of the market if IV Rank is low. One of my early iron condor mentors asked us to think like fishermen. If you see storm clouds and there is a hurricane warning, it is better to stay on shore than to try to go out to sea. If you are lucky, you may catch a few fish but if you are not, you could end up losing your boat! If you do decide to trade, then you need to allow your trade more “wiggle room” e.g. increase your loss thresholds so you do not get stopped out too easily, and reduce position size so losses will not be too big.

Another lesson learned is to check your calendar before you put on an iron condor trade. As retail traders, most of us have other things going on in our lives and we may not be able to watch the market all the time. If you are going away or will not have time to watch the market closely, then it may also be a good idea to stay out of the market. You do not want to come home from holidays to find your trade with an unrealized loss of 300% when your loss threshold is 100%. If you must put on a trade, choose a low maintenance strategy with a small maximum loss such as the iron butterfly.

A third lesson is perhaps the most obvious one – stick to the Trading Plan! If we had waited until IV Rank was above 30%, we would have put on our trade on 4 December when IV Rank went above 30%. As XJO was about 100 points lower at the time, our put spread would have been sold at lower prices and as IV was higher, the iron condor would have been wider and we could have achieved a winning trade with less stress.

As there is no RBA meeting in January, we will put on our February trade if IV Rank is higher than 30% and there are 30 days or more to expiry. I will provide another update on this model portfolio after the February trade is closed.

I have also completed updating the iron condor training videos on the Low Risk Income Member website. The iron condor training now includes more videos on risk management, money management and how to manage trades when profit targets and loss thresholds are used.

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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