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Quant Analysis: Iron Condor Back Testing Results – Part 2

February 13, 2019

February 13, 2019

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Quant Analysis: Iron Condor Back Testing Results – Part 2

These tests were by far the most interesting. One of the most popular strategies out there is the Short Strangle.

RECAP: Last week we published part 1 of our results, click here to read it now.

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 these tests.

The Tests:
Iron Condor strategies on every asset tradeable over 36 months with no active management.

Why Iron Condors?:
A lot of traders spend a large amount of time looking for trades that profit if a stock is going up or going down, but by using Iron Condors you can trade when you believe the stock is doing nothing and moving sideways. They allow you to trade with a neutral view, which provides limited risk and a higher relative probability of success.

Don’t know what an Iron Condor is?:
Click here for a quick video explaining the strategy

Test 5: 1 Strike Wings Vs Short Strangle

This is by far the most interesting test. One of the most popular strategies out there is the Short Strangle. This is due to the amount of premium you receive, plus the win rate is high and the probability of achieving a profit is also high. But we really wanted to understand the reality of this strategy. Is it really worth the preaching from so many experienced traders?
What makes this test interesting is that the Short Strangle is significantly less protected on the downside when compared to an Iron Condor – in fact, the losses for this type of trade are unlimited.

In this test, we compared an Iron Condor with the closest possible strikes versus a Short Strangle with the exact same sold legs. And the results were significant:

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.

We consequently found through a reasonable sample that there is a 90%+ chance of stocks trading through the sold legs, of which only roughly 30% come back to within the range, which is consistent with our analysis. We are doing more testing here, so keep an eye out.

All of this tells us is that Iron Condors really keep the odds in your favour as opposed to the riskier strategies. Protection makes a big difference for when you are wrong.

Key Finding: Short Strangles appear to be high probability strategies, but the statistics show they are quite dangerous.

Test 6: IV Rank is greater than 50

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.

In every test we ran, adding a filter for trading Iron Condors only when IV Rank is greater than 50 increased results significantly.

The results showed both the average monthly return and expected profit was slightly higher in the new test. Whilst the average amount of trades, the trade win rate, and the average loss amount were all much lower.

When you take all of these results into consideration and deduct brokerage – the final return result lifts 4% per annum based on our portfolio size.

This is because 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.

Key Finding: Higher IV Rank has a positive impact on trading Iron Condors. If IV Rank is greater than 50, results improve significantly before and after brokerage.

SUMMARY FINDINGS SO FAR

  • Iron Condors are safer than Short Strangles
  • Stocks with an IV Rank greater than 50 give you a better expected performance
  • 20-40 Days to expiry is the ideal time frame
  • Stock prices that are greater than $20-25 are better


 

*Please note: Past returns do not reflect future returns

Trading options is not suitable for everyone. There is a risk that you can lose more than the value of a trade or its underlying assets. You should only act on our recommendations if you are confident that you fully understand what you are doing. If you are thinking about acquiring a financial product, you should consult our Financial Services Guide (FSG) at www.reachmarkets.com.au and the relevant Product Disclosure Statement first.


General Advice Warning

Any advice provided by Reach Markets including on its website and by its representatives is general advice only and does not consider your objectives, financial situation or needs, and you should consider whether it's appropriate for you. This might mean that you need to seek personal advice from a representative authorised to provide personal advice. If you are thinking about acquiring a financial product, you should consider our Financial Services Guide (FSG) including the Privacy Statement and any relevant Product Disclosure Statement or Prospectus (if one is available) to understand the features, risks and returns associated with the investment.

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