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 June 2016 iron condor was a small winning trade.  We opened the trade on 6 May with 41 DTE when XJO was trading around 5250. XVI was at 18.52 giving us an IV Rank of 32%, just above the 30% level stated in our Trading Plan. We collected premium of 46 points for a 592 point wide iron condor.  A strong rally commenced immediately after we opened our trade. The short call (at 5450) of our iron condor was almost touched just 4 days after we opened our trade! I thought we were in for another losing month but the market pulled back slightly after that day and our trade was showing a healthy profit when XJO was trading at 5300 on May 24. All this unrealised profit evaporated with the big rally over the next few days. With only 2 weeks to expiry and our short call almost ATM, I was worried about our June trade as gamma risk is very high for ATM options close to expiry. A small move to the upside could quickly turn our June trade into a big loss. The stubborn bullishness in May made me very nervous so I decided to close our June trade for a small profit when XJO retested 5400 on May 31. Had I faithfully followed the trade exit rules defined in our Trading Plan, we would have easily reached our planned profit target of 50% as the market fell heavily the next day.

XJO chart as at 31 May 2016

We track our monthly performance without including brokerage cost as this will vary from broker to broker. Our performance for FY2016 is a total profit of $3650 or an 18% return on our trading capital of $20,000 for this model portfolio.

Performance as at June 2016

Portfolio Wrap Up

Our profit objective for this model portfolio was a 15-20% annual return on capital (ROC). This objective was met if we use 18%, which is the ROC before commissions. If we factor in the commissions we actually paid (at $2 per contract), our ROC is only 13.7%. Trading iron condors is very commission intensive as we have to pay commissions on 4 legs when we open and close trades. As we are using loss thresholds, we really do not need to buy the “wings” to define our risk. We were mainly buying the wings to limit the margins required as we were trading with a small account size of $20,000. We had an aggressive profit target so we needed to maximise our position size. We will look at trading undefined risk trades using larger accounts with lower profit targets in future model portfolios.

As a recap, the XJO Mark III model portfolio was traded using a similar strategy which had been back tested by DTR Trading using the SPX (see model portfolio set up). We added an extra trading rule to only trade when IV Rank is higher than 30%. Studies (done after we started this model portfolio) have shown that trading only when IV Rank is greater than 30% can severely limit the number of trading opportunities. We were fortunate that we were able to trade in 11 out of the past 12 months but studies on the SPX have shown that IV Rank was below 25% about half the time in the past ten years. This means on average, we would only have 6 trades per year if we only trade when IV Rank is higher than 30%. The SPX studies have also shown that the winning percentage is similar but trades are more profitable when IV Rank is higher. If I were to continue to trade this iron condor strategy, I would put on a trade every month without worrying about IV Rank.

After trading this iron condor strategy for a year, I would say it is a good trading strategy but it is less profitable than I originally thought. I imagined every winning trade would be closed at 50% of premium collected but as we can see from our actual results, profits were below 50% in 3 of our winning months for various reasons (including trader’s decisions to override the Trading Plan). I imagined every losing trade could be closed at 100% of premium collected but in real life, losses can easily exceed our loss threshold as we saw in our May trade. Back testing is good but there is nothing like trading with real money to get a good feel of a trading strategy. Mistakes, slippage and commissions can also quickly reduce profitability so always keep your trades small when you first start trading.

Your trading strategy should also fit your personality and lifestyle. My muse for the XJO iron condor strategies was my younger blog readers who typically have a higher risk tolerance and smaller amounts of trading capital. Since we started our first iron condor model portfolio in January 2014, we have learned a lot and improved how we trade these strategies in the past two and a half years. I do believe the iron condor strategy traded in the Mark III model portfolio can be a good trading strategy for busy people with full time jobs. Trade set up and management is simple and mechanical.

It is time for us to move on from trading “defined risk” option income strategies to trading “undefined risk” strategies. We will start our first model portfolio for undefined risk strategies in FY2017.

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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