This trading plan was created on 1 January 2015 for the XJO Iron Condor (Mark II) Model Portfolio. It was modified in May 2015 to manage winners at 50%.
- To achieve a 15-20% total return on capital annually
- To be profitable in 85-90% of trades
To collect an initial credit of 10% of capital per trade
- 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 3 times profit target
- To avoid expiry risk, look to close trade 2 weeks before expiry
Sell iron condors with short strikes at 10 delta (10% probability ITM) with 30-56 DTE
- Sell iron condors with short strikes at 16-20 delta (16-20% probability ITM) with 30-56 DTE
Actively manage winning side before 30 DTE to collect more income
- Take profit when 50% of max profit has been achieved
- Open iron condors with 30-56 days to expiry after previous month’s trade has been closed
expiry two months away on the day after options expiry e.g. open March iron condor on the Friday after January expiry.
- Sell at strike prices close to
1016-20 delta. Use technical analysis as engagement tool e.g.
- Aim to sell below recent support (for put spread) and above recent resistance (for call spread)
Consider legging into iron condor if price has had a big move and a reversal looks eminent e.g. touching edge of Bollinger band, MACD divergence
- Work out opening position size based on IV Rank (see Money Management Rules below).
Add to position if IV rank increases, before 30 DTE
Hold winning trade to expiry if price is far away from short strikes close to expiry. Close on the day before expiry if price is less than 50 points from short strike as the OPIC price on expiry day can be quite unpredictable.
- Close trade when profit target is reached. Our profit target is 10% of spread width which is $200 per contract for a 200 point spread. 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 >= 3 times our profit target
To avoid big losses, we will close early if: o loss is more than 3 times premium collected and max loss is greater than 70% o XJO strongly breaks above/below a significant resistance/support
Manage risk by actively rolling winning side if more than 30 DTE e.g. if delta rises to 30, look to roll the untested side to original probability of 10 delta. Or if delta falls to 5, look to take profit and roll to 10 delta. By collecting more credit on untested side, we will reduce our maximum loss. Use technical analysis as engagement tool e.g. keep short strikes above/below key resistance/ support levels when rolling. Convert to iron butterfly if tested side is ITM by 50 points or more
Risk Management rules
- We will manage our risk upon order entry. The best time for opening iron condors is when the IV Rank is high so we must keep position size small when IV is not in our favour when we open our trades (see Money Management Rules).
- Taking losses is part of our strategy. We expect 10-15% of our trades to be losers. However, we will adjust trades close trades early to avoid big losses.
We normally do not manage the tested side as the probability of touching one of the short strikes of our iron condor is 40% so we should expect our one of our short strikes to become ITM in 40% of our trades. The probability of expiring ITM is only 20% so we expect only half of these ITM trades to actually expire ITM. We will manage risk by rolling the untested side to collect more credit which will help to offset our losses should our tested side expire ITM. We will only manage the tested side to avoid catastrophic loss (see Exit guidelines).
Money Management rules
- We will scale our position size based on IV Rank when the trade is opened. 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
- The following is our capital allocation:
- 15% if IV rank is 25% or lower
- 30% if IV rank is 26 – 50%
- 45% if IV rank is above 50%
If IV increases in the first 30 days, we will add to our position. Example: At 56 DTE, IV rank is 20% so we open a trade with 15% At 45 DTE, IV rank increases to 40% so we add another trade with 15% At 30 DTE, IV rank increases to 70% so we add another trade with 15%
- Calculate IV rank to determine position size
- Check support / resistance, Bollinger Bands for good strike prices for short options
- Check options have at least 30 DTE