Over the last eight posts we reviewed the backtest results for Iron Condors initiated at 38 days to expiration (DTE) on the Russell 2000 index (RUT). To be consistent with all of the earlier backtests posted on this blog, we looked at 38 DTE Iron Condors initiated with short strikes at four different locations: 8 delta, 12 delta, 16 delta, and 20 delta.
For each of these four different short strike deltas, we tested three different starting structures, with six different dynamic exits. These various combinations, resulted in 21 separate eight year tests
for each delta when also including the three baseline (non-exited) tests. Lastly, each eight year test contained 96 unique trades.
To review, the three Iron Condor starting structures were composed of 20 point wide credit spreads with short strikes at the specified delta mentioned above, and defined as:
- Standard (STD): 10 put credit spreads, and 10 call credit spreads.
- Delta Neutral (DN): 10 put credit spreads, and from 5 to 10 call credit spreads - the number is adjusted at trade initiation to create a delta neutral Iron Condor.
- Extra Long Put (EL): 10 put credit spreads, 10 call credit spreads, and 1 extra long put.
The three categories of dynamic exit tested were:
- ML40% - this is a Margin Loss % Exit. Trades using this exit strategy either exit at 8 DTE OR if the trade has a loss greater than 40% of the margin requirement for the trade. (ML40% = Max Loss 40%)
- BSP - this is a Price Movement Exit. Trades using this exit strategy either exit at 8 DTE OR if the price of the underlying (RUT) moves below the strike of the short put. (BSP = Below Short Put).
- 0.6:0.6 - This is an Initial Credit % Loss/Profit Exit. Trades using this exit strategy either exit at 8 DTE OR if the trade has a loss of 60% of its initial credit OR if the trade has a profit of 60% of its initial credit. This can also be viewed as a Risk:Reward ratio; risking 60% of the credit to make 60% of the credit. A 0.7:0.9 variation would mean that the strategy is risking 70% to make 90%...taking a loss at 70% of the initial credit or taking a profit at 90% of the initial credit or exiting at 8 DTE if neither of the prior two criteria were satisfied.
The test results are summarized in the tables below. with one table for each of the four short strike deltas. The "Strategy Variation" column uses the nomenclature listed above in order to distinguish between the different variations.
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For the 8 delta Iron Condor options strategy variations, the Sharpe Ratio was lowest for the variations that were not dynamically exited, but these also had high win rates. You can also see the trend that the Initial Credit %Loss/Profit exits greatly reduced the "worst month" losses, with many of these losses only in the high teens. This reduction in the "worst month" values came at the cost of a reduced the win rate. The largest annualized monthly returns went to the STD-ML40% variation.
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None of the 12 delta Iron Condor variations had a Sharpe Ratio greater than 0.9. The highest win rates and worst months went to the non-dynamically exited variations, and the ML40% and BSP variations...the same pattern we noticed in the 8 delta strategies. The largest annualized monthly returns went to the STD-ML40% variation.
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With the 16 delta Iron Condor variations, the highest Sharpe Ratio was 0.8 and went to the DN-0.6:0.9 variation. The 16 delta variations continued the same win rate and worst month pattern that we observed in the 8 and 12 delta variations. The lowest worst month values were, in general, more than double the lowest worst month values for the 8 delta variations. The largest annualized monthly returns went to the STD variation without a dynamic exit.
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The 20 delta Iron Condor variations have the lowest Sharpe Ratios of the four different short strike delta variations. The highest Sharpe Ratio was 0.78 and went to the DN-0.6:0.6. The largest annualized monthly returns went to the STD-0.6:0.9 variation.
Across all of the 38 DTE Iron Condor strategy variations, it is clear that the Risk:Reward exits have a significant positive impact on the "worst month" values. It is also clear that the 2014 year was a loser for all of the 38 DTE variations. Another observation is that being able to stomach a bigger loss (via no dynamic exit, or ML40%, or BSP), in general resulted in many of the higher annualized average returns. If I was forced to trade one of these 38 DTE strategies "as is" with no adjustments, I would pick one of the 8 delta strategies using a risk:reward exit...these have summary statistics that are more agreeable to my way of trading.
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