Iron Condor Newsletter Soars in Q1
Apologies for the pun in the headline. In our defense, it could have been so much worse...
Since relaunching our flagship Iron Condor service with SPX and RUT weekly options in mid-December, it has been a busy and highly productive four months for us. The move from monthly to weekly options has been a success for several reasons:
- The shift to weekly options allows us to place up to 10 trades in a single month, versus only one trade per month when using monthly options. So even with one or two negative expiration cycles in a month, we can still have a positive month, provided the losses are kept as small as possible. And by opening a new set of contracts each week, it allows us to essentially "reset" our delta exposure with each new set of contracts.
- Diversifying across RUT and SPX index options has also benefitted our returns. Although the two equity indexes are positively correlated over longer periods of time, they do diverge more than one might expect over the course of a week. In the 22 weeks of running this new service live, we've seen five instances where one of the two index positions finished in the red while the other one was profitable.
- The low volatility environment that we are operating in is great for avoiding drawdowns but it reduces the premium we can bring in each week. By using weekly options, we increase the chances that we can sell some premium during a very brief spike in volatility. If we were still using monthly options, it would be less likely to catch them.
- Bid/ask spreads and liquidity continue to be very reliable in both indexes. Especially with macro-economic events on the calendar like the recent French elections, traders looking to hedge are using short-term contracts to cover the event. Since we sell those spreads, we are able to get in and out of positions with limited drag.
Any time there is a shift in a trading strategy, it is important to see how well the live trading conforms with the backtest and research. A few learnings there:
- The win rate and overall performance in live trading has been very consistent with the backtest results. Premiums received have been slightly lower due to the multi-year lows in implied volatility but those will likely rise once the markets begin to break out of their current trading ranges.
- Our hedging approach of buying long spreads to reduce delta exposure has been less effective than simply closing the portion of the iron condor position that was endangered. By using a simple quantitative rule for when we close a spread, we have further streamlined our approach to risk management. It is also easier to execute and simpler for our newer subscribers.
- The monthly strategy and strike selection methods that we used in the previous version of the iron condor service work well with weekly options. It is always reassuring to see a strategy work effectively across different time frames.
Overall, the service has posted gains of 6.82 through May 6. With starting capital of $3,000 (enough to cover two weeks of open positions plus cash to buy back spreads at risk), that is a return of 23%.
You can review our complete trade performance here. If you're interested in joining the iron condor newsletter, we offer a free 15-day trial and 10% off for anyone who os signed up for our email newsletter. Learn more...
Rebooting the Trend Newsletter
After re-launching the weekly Iron Condor service, we turned our attention to the Trend newsletter. While it had been a steady performer since the original launch in 2014, we swapped out several of the underperforming models and retired the short-term pattern model which suffered from a sub-par number-of-trades-to-gains ratio. Trading costs are a big factor for any retail trader and we wanted to offer a more efficient approach to directional exposure. A few other new benefits to note:
- We've added exposure to ETFs based on the VIX futures. Rather than use options on these, we have chosen to gain exposure by buying the ETFs directly. They're fairly volatile relative to index ETFs so the potential for movement is still significant. The volatility models that we use allow for both long and short volatility exposure depending on the market conditions.
- After testing the medium -term trend model across the various ETFs, we've found that the correlations on that time frame (1-3 months) tends to be high. So rather than buy overlapping positions in IWM, QQQ and SPY in that timeframe, we have simplified the medium term trend model to focus on the SPY. We will employ longer-dated options contracts than we did in the previous trend models and will continue to sell short-dated OTM options against the core position.
- The index reversal model will continue to go long or short overextended ETFs via long options (either puts or calls). These models were re-tested earlier this year and held up well across a range of ETFs in both directions.
We've updated the Trend performance page with our monthly trade log as well as the stats from the testing that led us to the model improvements. The Trend service has been designed to compliment the Iron Condor service so be sure to check out the offer we have on a discounted subscription for both newsletters.
What We're Reading
It's a strange time in the market, with a litany of news headlines threatening to disturb the abnormally calm markets. A few articles that help make sense of the current market conditions and where we might be headed:
- A low VIX has everyone worried (Bloomberg)
- Talk about liquidity! More than $4 Trillion Parked in ETFs (Valuewalk)
- What if central bankers start selling their bond holdings? (WSJ)
- What drove the strong market performance in Q1? Hint: It wasn't Washington. (The Fat Pitch)
- Not market-related but a great read nonetheless: The power of curiosity (Medium)
As always, it's important to note that past performance is never a guarantee of future results. ETFs, investing and options trading all carry with them significant financial risks. More details about the risks here.