Back Testing

Dmitry has done us all a good service by providing back testing data for two years, 2007, 2008. The raw data appears at the end of this post.

These are the trade conditions:

Trading 10 (10-point wide RUT) iron condors every month

Selling deltas of ~25 put; ~20 calls for whatever the prices are, three month options, opened the day after expiration.

Adjusting when RUT is 10 points or less OTM, at the end of the day.

Rolling (into options that expire in the same month) if more than half time remains to 20 deltas. If time remaining is less than half – exit.

Closing positions ~7 days prior to expiration.

Results:

2007: 11 winners; 1 loser; average monthly gain per iron condor: $157
2008: 8 winners; 4 losers, average monthly gain per iron condor: $102

Note: The four losing months in 2008 occurred from July through October

Comments

There are some features of these trades that warrant a mention. They are different from the methods used by most iron condor traders. Thus, if you are considering adopting the adjustment method described, please note that they are unlikely to be compatible with your chosen iron condor strategy because:

  • Positions are opened 13 weeks before expiration. On that first day, you would be trading options with zero open interest, and that is uncomfortable for some traders. If you wait a couple of days before making the trades, expect a slight difference in the results
  • The original trade is made by selling options with a relatively high delta for iron condor traders. In fact, 25 delta for the put option may be the trigger for an adjustment or exit for the trader who opens positions with options whose delta is 7 to 8
  • The cash collected for the iron condor is likely to be near $4.50. Expect more when IV is elevated and less when IV is lower. With the maximum loss established as $550 per iron condor, there is less urgency to make an adjustment. Thus, your entire outlook and ideas about trading iron condors may not be applicable when following this method.

    Please do not take this as a warning to avoid this idea. Instead, if you consider adopting it – and it is a fairly mechanical system, with little room for personal touches – be certain that you are comfortable with, and can tolerate, the different risk/reward scenario described

    This trade suggestion is ideal for paper trading accounts. Then you can get a feel for thinking differently about iron condors, can see how well you like these ideas, and can adopt them, if all is well. If you are queasy or uncertain after several months of paper trading, then this will not be for you.
  • Adjustments are made and only when time to expiration is greater than 45 days, or one half of the original time. Trading front-month options, adjustments would occur fairly near expiration, and I anticipate that the results would be very different
  • The adjustment is to cover the endangered short spread and sell another spread with the same expiration date. The newly sold short option has a delta of 20 and the spread is 10 points wide. This trade costs cash. One reason that this is attractive is: the original trade collected approximately $450 (and this will vary as implied volatility changes), and the adjustment costs far less. Anyone who trades near-term iron condors will discover that this adjustment is difficult to make because the adjustment is likely to cost more than the original credit. Although I don’t have a problem with that – it is true that many would find it impossible to pull the trigger on that trade.

    Thus, I urge anyone who wants to try this methodology to use three-month options and/or to use a paper-trading account.
  • Adjusting end of day, instead of when needed can cause problems. I know I would be uncomfortable watching a morning trigger, followed by a 5% market decline – and then adjusting at the end of the day. Of course, that is countered when the trigger is nullified later in the day.

Conclusions

1) The monthly gains are excellent. The maximum margin requirement is $30,000, and is reduced during those times when some positions have been closed early.

2) Return on margin for 2007: 5.2% per MONTH; for 2008: 4.0% per month. The ROI (return on money invested) depends on how much of your equity is used to back up this trading account.

3) More remarkable than the profits is the number of times that the position was adjusted.

In 2007, there were NINE months in which the original trade was adjusted – or closed early (when short option was 10 points OTM). That’s 75% of the time. Would anyone expect to make money when adjusting 75% of the time? Especially when waiting until the short option was almost ITM? I can tell you that I did not have expect this. I did think adjustments would be required frequently, but the truth is that traders must have some idea of how a given trading method works. Thus, keep your own records. They will be valuable in the future.

In 2008, the position was also adjusted in NINE different months. The profits were less spectacular, but still outstanding.

4) Special note. It may seem ‘obvious’ that if we did so well and adjusted so many times, that we can do much better by making the original trade just one more strike out of the money. I don’t have the numbers, but that is a fallacy.

First, one 10-point strike further OTM on each side reduces the premium collected by roughly $50 to $60 per iron condor. Next, the ONLY time this move eliminates an adjustment occurs when the underlying moves within 20 points of the new strike prices AND DOES NOT continue another 10 points to the new trigger. It is highly doubtful that this warrants collecting so much less in premium.

Something else to consider is that rolling to the 20 delta option would now encompass a roll that is 10-points narrower, and would cost less. We would not recover all of the $50 to $60 sacrificed when the trade was made, but it would recover some of that cash.

With the right back-testing software, many years of data becomes instantly available. But for now, I am intrigued by this study. Thank you Dmitry.

The data

2007:
Trade 1
22.01.07 Sold 730 & 840
12.04.07 Exit
P/L = 370$

Trade 2
20.02.07 Sold 780 & 880
28.02.07 Rollldown 780 to 730
09.05.07 Exit
P/L = 200$

Trade 3
19.03.07 Sold 730 & 850
22.05.07 Exit, no roll
P/L = 20$

Trade 4
23.04.07 Sold 780 & 880
10.07.07 Exit
P/L = 370$

Trade 5
21.05.07 Sold 780 & 890
26.07.07 Exit, no roll
P/L = 40$

Trade 6
18.06.07 Sold 790 & 910
26.07.07 Rolldown 790 to 720
14.09.09 Exit
P/L = 177$

Trade 7
23.07.07 Sold 770 & 910
27.07.07 Rolldown 770 to 700
09.10.07 Exit
P/L = 222$

Trade 8
20.08.07 Sold 710 & 870
07.11.07 Exit
P/L = 357$

Trade 9
24.09.07 Sold 740 & 880
19.11.07 Exit, no roll
P/L = 27$

Trade 10
22.10.07 Sold 740 & 890
19.11.07 Rolldown 740 to 670
11.01.07 Exit
P/L = 180$

Trade 11
20.11.07 Sold 670 & 840
17.01.08 Exit, no roll
P/L = 82$

Trade 12
24.12.07 Sold 720 & 870
04.01.08 Rolldown 720 to 640
10.03.08 Exit
P/L = -155$

Net 2007 P/L = 1,890$
An average of 157$ per month.

2008

Trade 1
23.01.08 Sold 630 & 770
09.04.08 Exit
P/L = 405$

Trade 2
19.02.08 Sold 640 & 790
10.03.08 Rolldown 640 to 570
09.05.08 Exit
P/L = 195$

Trade 3
24.03.08 Sold 630 & 780
12.06.08 Exit
P/L = 395$

Trade 4
21.04.08 Sold 660 & 790
03.07.08 Exit, no roll
P/L = 47$

Trade 5
19.05.08 Sold 680 & 800
01.07.08 Rolldown 680 to 630
07.08.08 Exit
P/L = 215$

Trade 6
23.06.08 Sold 650 & 790
07.07.08 Rolldown 650 to 580
11.09.08 Exit
P/L = 192$

Trade 7
21.07.08 Sold 640 & 770
02.10.08 Exit, no roll
P/L = -7$

Trade 8
18.08.08 Sold 680 & 820
15.09.08 Rolldown 680 to 610
03.10.08 Exit, no roll
P/L = -197$

Trade 9
22.09.08 Sold 640 & 810
02.10.08 Rolldown 640 to 540
08.10.08 Exit, no roll
P/L = -305$

Trade 10
20.10.08 Sold 470 & 650
23.10.08 Rolldown 470 to 390
20.11.08 Exit, no roll
P/L = -227$

Trade 11
25.11.08 Sold 370 & 550
13.02.09 Exit
P/L = 435$

Trade 12
22.12.08 Sold 410 & 580
19.02.08 Exit, no roll
P/L = 80$

Net 2008 P/L = 1,228$
An average of 102$ per month.

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