Back in June 2016, I thought about using a straddle strategy to help “Jane”, a hypothetical retiree increase the returns from her cash /fixed interest assets. Her investment objective is to get a modest increase on the return from these assets without taking too much risk. Brexit provided a good stress test for that model portfolio and we quickly found out that XJO was not a suitable vehicle for trading straddles, so it was back to the drawing board to find a new options income strategy that might be suitable for Jane.

Thanks to a 30-year study sponsored by The Chicago Board of Options Exchange (CBOE), we have a good idea of the long-term performance of various popular options income strategies such as the buy write (or selling covered calls), put write (or selling covered puts), iron condors and iron butterflies. The study found that the top two performing strategies were the 30-delta buy write (tracked by the BXMD index) and the put write (tracked by the PUT index) which had an average annualised return of 10.66% and 10.13% respectively.

However, Jane’s objective is not just to get high returns. She also does not want to take too much risk and would prefer not to see big drawdowns in her capital. When we compared the riskiness of each strategy, we found that both BXMD and PUT had big drawdowns as shown in the table below. The least risky strategy appears to be the 20-delta iron condor strategy as tracked by the CBOE option selling index called CNDR. For example, the maximum drawdown was only 13.66% which is very much lower than the other better performing strategies. The CNDR index was only down less than 4% in 2008 when both the higher return strategies were down over 25%.


Source: Performance Analysis of CBOE S&P 500 Option-Selling Indices

The average annualised return of CNDR is 7.09%, which is not bad and if Jane is comfortable with the risk, this could well be a suitable strategy for her.

As discussed in an earlier blog post (see Position Sizing and Expected Portfolio Returns), we know the portfolio returns for iron condors will depend on the position size. The position sizing for the CNDR index is based on allocating 10% of the portfolio for each trade, which is quite conservative. We could get a better return if we increase the position size. For example, if we increase the position size by 50%, i.e. from 10% to 15% of the portfolio, we would expect the annualised return to increase from 7.09% to 10.63% (7.09% x 1.5) which would match the performance of BXMD and PUT. In a bad year like 2008, the drawdown would also increase from 4% to 6% (4% x 1.5) which is still a lot lower compared to BXMD and PUT.

There might also be another way to increase returns without having to increase position size. In the CNDR index, iron condors were held to expiry. However, from many other studies done by Tasty Trade and DTR Trading, we know that returns can be improved and volatility can be reduced by actively managing iron condor trades (like what we did in the XJO Iron Condor Mark III model portfolio). The chart below shows how a simple combined management strategy (see blue line) of

  • managing winners at 50% and
  • closing any open trades at 21 days to expiry (DTE)

can improve performance and reduce volatility compared to holding to expiry (see grey line).


Source: Tasty Trade Portfolio Allocation for Iron Condors – Part 2

The same study also shows that with a portfolio allocation of 25%, the actively managed iron condor strategy can outperform the SPY buy and hold strategy by 70%.

Based on the above studies, this is what I would do if I was Jane, if I am happy with an average annualised return of 7% and am comfortable with the risks for CNDR as shown in the CBOE study. I would use a 10% portfolio allocation to trade 20 delta iron condors just like CNDR but to further improve performance and reduce volatility, I will actively manage my iron condors using a simple combined management strategy such as the one shown in the Tasty Trade study (i.e. managing winners at 50% and closing any open trades at 21 DTE).

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