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Saturday, March 25, 2017

Weekly Trade Summary: Mar 19-Mar 25

Last week I closed a losing trade in the March 31 expiration, and tried unsuccessfully to open a new butterfly on the May 31 expiration.  Meetings and travel made entering a new trade really challenging last week.

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Original Trade Entry: Jan 24 - BWB on the March 31 expiration (see this post)
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Adjustment: Feb 13 - moved all 3 of the 2300 puts to 2285 for a $3.70 credit (see this post)
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I currently have 7 open trades, with expirations in April (3) and May (4):
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Total defined risk for these trades has decreased with the trade closed last week and is currently at 39.9% of the account net liquidation value. This risk is broken down into the following groups:

  • 12.3% of net liq - DOTM BWB - hedges
  • 27.7% of net liq - core BWB (at 75% of target size, but increasing with new trades)
15 trades have been closed this year...9 wins and 6 losses. Return on the account for the year is at 1.5%.  Total win rate is at 60%.  Win rate on core trades is at 62% and on the low side of the expected range. Of the 7 open trades, 5 are core and all core are currently up money.


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Tuesday, March 21, 2017

73 DTE Iron Condor Results Summary

This article reviews the backtest results for iron condors (IC) entered at 73 days to expiration (DTE). These tests covered 9 IC variations, with short strike deltas at four locations (8, 12, 16, 20), utilizing 12 exits.  In all, there were 432 test runs (9 variations x 4 deltas x 12 exits). Each test run executed an average of 174 SPX IC trades between the January 2007 expiration and the September 2016 expiration.  A total of 432 ten year backtests.  I used weekly options for this testing, so there were more than 12 trades per year.  In total, there were 75,096 total trades entered for the 73 DTE testing.

You can find the prior SPX IC posts in this series at the links below:

Normalized P&L per Day

The P&L per day values shown in the charts below are expressed as a percentage of the max risk for that test run.  Each of the different wing width ICs (25 point, 50 point, 75 point) will have a different max risk, and it is important to normalize daily returns by the associated max risk number.  For example, a 25 point IC will have slightly less than $25K max risk (margin), while a 75 point IC will have slightly less than $75K max risk (margin).  Since the 25 point IC will have approximately 1/3 the risk/margin, the $ returns need to be normalized by these varying max risk / margin numbers for proper strategy variation comparison.

The results:
  1. We continue to see more variability in P&L per day readings in the 25 point wing ICs, than in the larger wing width ICs
  2. Similar to the prior test runs, as the delta of the short strikes increases, the variability in the P&L per day readings increases
  3. The largest reading was 0.17%, which is smaller than the largest reading for the 38, 45, and 59 DTE ICs.  There was one strategy variation with a 0.17% value:
    1. ST (100:75), 25 point wings, 20 delta
  4. The next best readings came in at 0.16% and were associated with four test runs: 
    1. ST (100:50), 25 point wings, 20 delta
    2. ST (NA:75), 25 point wings, 20 delta
    3. ST (300:75), 25 point wings, 20 delta
    4. ST (200:75), 25 point wings, 20 delta
  5. 46 strategy variations had P&L per day readings of 0.12% or greater:
    1. Of these 46, 35 used the standard balanced (ST) IC structure
    2. Of these 46, 30 used wing widths of 25 points
    3. Of these 46, 26 used the profit taking level of 50%
    4. Of these 46, 25 used a short strike delta of 20
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Normalized P&L per Trade

The normalized P&L per trade charts display returns expressed as a percentage of the max risk for a given test run.  As trade duration increases with increasing DTE, overall P&L per trade increases. Due to this fact, the max value of the y-axis on the 73 DTE P&L per trade charts was increased from 6% to 12%.  The 16 delta and 20 delta variations had some values exceeding the 6% level.

The results:
  1. The variability in normalized P&L per trade again increases as the delta of the short strike increases, and decreases with increasing wing width
  2. In general, the returns per trade increase with increasing loss taking %, and this trend continues to be more pronounced as the trades move out in time / DTE
  3. The largest normalized P&L per trade was 9.1% and was associated with two strategy variations:
    1. ST (NA:75), 25 point wings, 20 delta
    2. ST (300:75), 25 point wings, 20 delta
  4. 112 variations had P&L per trade values of 5.0% or greater...this is a huge number!:
    1. 60 of these 112 were standard (ST) structures (34 were DN structures)
    2. 57 of these 112 used a short strike delta of 20 (44 used 16 delta)
    3. 51 of these 112 did not use a profit taking level (44 used the 50% level)
    4. 44 of these 112 did not use a loss taking exit (41 used the 300% level)
    5. 44 of these 112 used 25 point wings (41 used 50 point wings)
  5. The 73 DTE ICs have the largest average P&L per trade readings:
    1. 73 DTE: mean 3.92% / SD 1.73%
    2. 66 DTE: mean 2.79% / SD 1.09%
    3. 59 DTE; mean 2.75% / SD 1.20%
    4. 52 DTE: mean 2.33% / SD 0.88%
    5. 45 DTE: mean 2.23% / SD 0.87%
    6. 38 DTE: mean 1.88% / SD 0.75%
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Win Rate

The win rate trends have been consistent across the DTEs tested:
  1. In general, win rates tend to increase as wing widths increase
  2. Win rates tend to decrease as the delta of the short strikes increases
    1. As the short strike delta increases to 16 and 20 delta, there is only a slight increase in win rate when taking losses greater than 200%
  3. The 50% profit taking level has the highest win rates
  4. The top win rate was 96%, and was associated with four strategies:
    1. ST (NA:50), wing width 75, 8 delta
    2. EL (NA:50), wing width 75, 8 delta
    3. DN (NA:50), wing width 75, 8 delta
    4. EL (NA:50), wing width 50, 8 delta
  5. 49 strategies had win rates of 91% or better:
    1. Of these 49, 39 took profits at 50%
    2. Of these 49, 31 did not use loss exits (they exited at 2 DTE; loss taking % = NA)
    3. Of these 49, 26 had short strike deltas of 8
    4. Of these 49, 22 had wing widths of 75 points
  6. The strategies with the top win rates also had some of the largest single losses...and this is consistent across the DTEs tested
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Largest Loss

The next charts show the normalized largest loss for each of the test runs  These largest losses are expressed as a percentage of the max risk found in the roughly 174 trades in each test run.

The results:
  1. Typically, the largest loss percentage increases with increasing loss taking level
  2. There were three strategy variations that had losses measurably greater than 100% of risk.  They were the 25 point wing, 12 delta shorts, EL using a loss taking level of 300%.  These variations hit a loss of 117% of risk due to bad data.
    1. This bad quote was associated with the 17-Sep-2011 expiration, and occurred on 24-Aug-2011. This was the same expiration that was hit with bad data in the 66 DTE trades.
  3. 43 strategy variations had largest loss readings of 95% or greater:
    1. Of these 43, 27 used wing widths of 25 points
    2. Of these 43, 25 used the ST structure
    3. None of the 43 used a loss taking level (loss taking % = NA)
  4. 42 strategy variations had largest losses that were 29% or smaller:
    1. Of these 42, 33 had short strike deltas of 8 and loss taking at 100%
    2. Of these 42, 21 used wing widths of 75 points
    3. Of these 42, 19 used the extra long put (EL) structure
  5. The top three smallest losses were associated with the following strategies:
    1. DN (100:50), 75 point wings, 8 delta -> 15% loss  (win rate 82%)
    2. EL (100:75), 75 point wings, 8 delta -> 16% loss  (win rate 72%)
    3. ST (100:50), 75 point wings, 8 delta -> 17% loss  (win rate 77%)
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Profit Factor

The profit factor results are listed below:
  1. Profit factors increase for variations not using a loss taking % (loss taking % = NA)
    1. This trend is more pronounced at the lower short strike deltas of 8 and 12
  2. 110 strategy variations had profit factors of 2.0 or greater...this is a big increase from the number of variations meeting this criteria at 66 DTE.
    1. 57 of these 110 did not use a loss taking exit (loss taking % = NA)
    2. 55 of these 110 used the delta neutral structure (DN)
    3. 49 of these 110 took profits at 50%
    4. 46 of these 110 had short strike deltas of 8
  3. The top tree performers were:
    1. DN (NA:50), 75 point wings, 12 delta -> profit factor of 3.1 (win rate 95%)
    2. DN (NA:50), 50 point wings, 8 delta -> profit factor of 3.0 (win rate 95%)
    3. EL (NA:50), 50 point wings, 8 delta -> profit factor of 3.0 (win rate 96%)
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Average DIT For Winning Trades

This metric was derived by averaging all of the DIT for all of the winning trades in a test run. Adding a DIT exit to your profit and loss exits is worth considering.

The trends associated with this metric are consistent with the prior DTE test runs:
  1. As short strike deltas increase, trade duration increases
  2. As profit taking level increases, trade duration increases
  3. The 50% profit taking level should have you out of your trade between 21 and 42 days for a 73 DTE IC, depending on short strike delta
  4. The smallest winning trade DIT of 21 was associated with 8 delta short strikes, 25 point wings, profit taking at 50%, loss taking at 100%, and the EL structure.  The same configuration but using either the ST or DN structures yielded a an average DIT for winning trades of 25
  5. There were 40 variations with winning trade DIT values less than 30:
    1. All 40 took profits at 50%
    2. 32 of these 40 used 8 delta short strikes
    3. 17 of these 40 used the loss taking level of 100%
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Friday, March 17, 2017

Weekly Trade Summary: Mar 12-Mar 18

No new trades or adjustments this week.  Metrics are the same as last week.

I currently have 8 open trades, with expirations in March (1), April (3), and May (4):
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Total defined risk for these trades has decreased with the trades closed last week and is currently at 50.1% of the account net liquidation value. This risk is broken down into the following groups:
  • 12.6% of net liq - DOTM BWB
  • 37.5% of net liq - core BWB (at 75% of target size, but increasing with new trades)
14 trades have been closed this year...9 wins and 5 losses. Return on the account for the year is at 1.7%.  Total win rate is at 64%.  Win rate on core trades is at 69% and within the expected range.


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