Overview

This trading plan was created on 5 June 2015 for the XJO Iron Condor (Mark III) Model Portfolio.

Objectives

  • To achieve a 15-20% total return on capital annually
  • To achieve 10% return on capital per trade by collecting an initial credit of 20% of capital per trade and closing trade when 50% of max profit has been achieved
  • To avoid large losses i.e. limit max loss to 100% of credit collected (or 2 x target profit)

Trading Strategy

  • Sell iron condors with short strikes at 20 delta i.e. roughly 20% probability of expiring in-the-money (ITM) with 30-56 days to expiry (DTE)
  • Take profit when 50% of max profit has been achieved

Entry Guidelines

  • Open iron condors with 30-56 DTE after previous month’s trade has been closed
  • Sell at strike prices close to 20 delta

Exit Guidelines

  • Close trade when profit target is reached. Our profit target is 50% of premium collected. Set this up as a GTC (Good-till-cancelled) order after trade is opened.
  • To avoid big losses, we will check our positions after market close daily and close our trade if unrealised loss >= credit collected
  • Close any open trades 1 week before expiry to avoid gamma risk. This will also allow us to place the next month’s trade with 35 or more DTE

Risk Management rules

  • We will manage our risk upon order entry. The best time for opening iron condors is when the Implied Volatility (IV) is high so we will not trade when IV is not in our favour when we open our trades. We will only place a trade if IV Rank is >= 30%. IV rank is calculated using the value of XVI, the 30 day implied volatility of XJO using the formula below:
    • IV Rank = (current XVI price – 52 week low) / (52 week high – 52 week low) x 100
  • Taking losses is part of our strategy. We will avoid big losses by closing trades when the unrealised loss exceeds the premium collected.

Money Management rules

  • We will allocate 50% of initial capital (e.g. $10K for a $20K account) to each trade.
  • As our loss threshold is set at 100% of premium collected, our initial risk per trade would be roughly 20% of capital allocated to the trade or 10% of our initial capital.
  • We will place a new trade only after the previous one has been closed.

Pre-Trade Checklist

  • Calculate IV rank. Trade only of IV Rank is >= 30%
  • Check options have at least 30 DTE

One Response to XJO Iron Condor (Mark III) Trading Plan

  1. Ahmad Mohammad says:

    Hello Christina: Happy New Year 2016 to you and your family in Australia. Many thanks for your email containing January 2016 update to your XJO Iron Condor Model Portfolio. This is very interesting email. It shows the real life “ifs” and “but”s of what to do if the trade goes against you and we do face these real life situations all the time. It is good to stick to your original plan always, but if you do not do that, then sometimes a deviation from your expected actions can be tolerated or can even be profitable, as shown by not closing of your December trade by one of your students (mentees). This trade has, nevertheless, given us valuable lessons from which we can greatly benefit in the future.

    Please keep on the good work. If we use your trading plan on SPX here in the US, then I doubt if it is applicable, because most often our IV Rank for the SPX is rarely over 30% most of the time. Perhaps we may need to modify the trading plan a bit to accomodate our lower than 30% IV Ranks.

    Regards,

    Ahmad Mohammad

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