Optimising Your Iron Condors – The Key Findings so Far
Iron Condors are one of our favourite options strategies and popular amongst experienced options traders. So, recently we decided to backtest the numbers and look for ways to optimise the results of our LITT trading system.
Iron Condors are one of our favourite options strategies and popular amongst experienced options traders. So, recently we decided to backtest the numbers and look for ways to optimise the results of our LITT trading system.
About 6 months ago we created a number of hypotheses we wanted to test. Our quantitative analysts have been automating our rules and processes to brute force the tests on every asset tradeable over 36 months with no active management.
Below are our key findings released so far.
1. Iron Condors are safer than Short Strangles
In this test, we found the average monthly return was -9.14% for the Straddle as opposed to 3.6% for the Iron Condor. Looking further, the total profit/loss was -$177,216 for the Strangle and $109,297 for the Iron Condor.
This tells us that Iron Condors really keep the odds in your favour as opposed to the riskier strategies. Protection makes a big difference in the cases where you are wrong.
2. Stocks with an IV Rank greater than 50 give you a better expected performance
Implied Volatility (IV) Rank is one of our favourite indicators. In a single figure, it shows you how expensive Implied Volatility is compared to itself over a 52 week period. Therefore – High IV rank shows Options that are expensive & thus better for selling premium.
This test showed us that when IV rank is high, the premium becomes more expensive and as a result, your Iron Condors become wider with more favourable risk/reward ratios.
3. 20-40 Days to expiry is the ideal time frame
Most of the volatility movement occurs in the period of the first 45 days, from then on, you are not really rewarded by the difference in premium versus the added uncertainty risk.
Between the first 15-45 days to expiry, however, there is a difference, and that’s what this test proved to us.
4. Stock prices that are greater than $20-25 are better
In this test, we just wanted to isolate the most solid stocks – the blue chips.
We found that when you take out the stocks at the lower end of the range, this is where you can get the best risk/reward and profitability on your Iron Condor trades.
This week we concluded our testing on Iron Condors and presented our findings live with a one-off webcast. Please visit out trading page to register for future trading webcasts.
*Please note: Past returns do not reflect future returns
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