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 May 2016 iron condor was a losing trade.  We opened the trade on 5 April with 44 DTE when XJO was trading around 4900. XVI had risen up to 18.94 giving us an IV Rank of 34%, just above the 30% level stated in our Trading Plan. We collected premium of 44 points for a 638 point wide iron condor.  A strong rally commenced shortly after we opened our trade. The short call (at 5150) of our iron condor became ITM in just 14 days! Our May iron condor was right on the edge of our loss threshold (of 100% of premium collected) on 20 April when XJO was trading at 5220. Thanks to the overnight rally in iron ore and oil, the market shot up 60 points the next morning so we had to close our May iron condor trade for a loss on 21 April.

XJO chart as at 21 April 2016

We track our monthly performance without including brokerage cost as this will vary from broker to broker. Our performance as of May 2016 is a total profit of $3550 or a 17% return on our trading capital of $20,000 for this model portfolio.

XJO IC Performance as at May 2016

This one big loss has wiped out the profits from the past 3 months. This month’s trade shows just how hard it is to manage losing trades in real life. At the end of day on 20 April, our unrealised loss was around $2000, which is just below our loss threshold. A sharp rally the next day increased our losses to 40% above our loss threshold! It is hard to decide whether to hold or fold when a trade is right on the edge of our loss threshold. After a strong bear market rally, we expect a retracement, which is why I decided to keep the trade on instead of closing it on the 20 April. However, we must remember John Maynard Keynes’s famous quote “Markets can remain irrational longer than you can remain solvent” and we have to stick with our trading rules. Taking losses is part of the trading strategy and we need to just accept this and move on.  We must also take the possibility of exceeding planned loss thresholds into consideration when we do position sizing, something I am currently working on. I am studying Van Tharp’s book The Definitive Guide to Position Sizing to learn how to work out an optimal position sizing for our iron condor strategies.

As I write this update, the IV Rank has fallen to 23% which is below the minimum IV Rank of 30% in our Trading Plan. If IV Rank goes back above 30%, we will put on our June trade after the next RBA meeting which will be held on 3 May 2016. I will provide another update on this model portfolio after the May trade is closed.

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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