Friday, May 16, 2014

Iron Condor Backtest - RUT - 38 DTE

In this post we will look at the automated backtesting results for four variations of a 38 days-to-expiration (DTE) iron condor (IC).  As with the three prior tests, the short strikes for both the call credit spreads and put credit spreads will be at approximately the same delta.  See my post Thoughts on Options Strategy Backtests for some background on my testing approach.  The prior IC backtesting results posts can be found at:
As with the other tests, in these backtests there will be no adjustments during the trades and no hedging to start the positions leaning one direction or another.  Many of these settings are available in the backtester, but we will continue to look at this basic IC case.  Here are the setup details:

(1) The backtester will start looking for trades that meet the entry DTE requirement after this date
(2) The backtester will not take any trades that will have an exit DTE after this date
(3) Some trading platforms call 38 DTE, 36 DTE (e.g., TOS).  The OSB uses a DTE based on the number of days to the expiration date in the option code/opra code, which is a Saturday for indexes
(4) Some trading platforms call 8 DTE, 6 DTE (e.g., TOS)
(5) Russell 2000 Index options
(6) Four 38 DTE "no-touch" iron condors will be tested with their short strikes at varying deltas (8, 12, 16, and 20)
(7) The distance between the short call and long call (also, the distance between the short and long puts)

The equity curves for each of the four variations are shown in the graph below.  In addition to the equity curves, the ATM IV at trade initiation is also plotted (the average of the ATM call IV and ATM put IV).  Please note that the dates in the chart are expiration dates.

If I pick a random expiration date, for example 03/22/2008, we can see that when the trade was initiated, the ATM IV was 28.  When the trade was closed, the cumulative non-compounded profit had grown to between $19.7k and $24.4k depending on the short delta of the variation of the strategy.

For these trades, the maximum reg-t margin requirement is between $16.3k and $18.7k assuming your brokerage only margin's one side of your IC.  If you have portfolio margin, your requirement is somewhere around one-quarter to one-half the reg-t margin numbers.

In the table below are the standard trade metrics for the four ICs with different short strikes (8 delta, 12 delta, 16 delta, and 20 delta).

Similar to the other "no touch" trades tested, there are some big drawdowns in these trades because of the lack of adjustments and hedging.  The number of losing trades decreases with the size of the short deltas..the further away from ATM, the higher the win rate.  The combination of shorter DTE and closeness of the short strikes makes these higher delta condors have a lower win rate.  On the other hand, the higher credit received for the higher delta strategies' trades does result in the higher delta strategies having a higher AGR.

In the heat maps, we can see the performance by expiration month of each of the individual trades of each of the four strategies.  The 0% cells represent expiration months were no trade was initiated.  Some of these 0% cells are due to lack of data or bad prints on the trade entry day...leading the backtester to skip that month for testing.

We can also look at the 8 delta strategy in terms of the P&L range (in %), range of the underlying (in %), and IV range (in %), for each trade by expiration month.  This data is shown in the graphs below.  These graphs are showing the open, which is the 0% level, the high (green bar), the low (red bar), and the value at trade close (the blue line).  Also, note that the months shown on the horizontal axis are not displaying expiration dates in order to make the charts less cluttered with axis labels.

The top graph displays P&L range for the 8 delta variation of the 38 DTE "no touch" IC.  You can see that when a trade closes profitably, the range is mostly on the positive side of the graph, with losing trades being exactly the opposite.

The middle graph shows the range of the underlying, the RUT, in percent terms during the life of each trade.  The bullish bias of the US markets is still evident in this shorter duration trade, although not as obvious as with the longer duration (e.g. 80 DTE IC).

The bottom graph shows the ATM IV range and closing value in percent terms, during the life of each IC trade.  IV decays to zero as we approach expiration, so you would expect these bars to be mostly red, with the closing value to be negative (the blue line).  There were several times where ATM IV finished higher, and green...usually when there were market expected.

The next three graphs show the P&L range for the 12 delta, 16 delta, and 20 delta variations of this 38 DTE "no touch" IC strategy.  You can see the increase in P&L volatility as the delta increase from 12 to 20.

In the next backtesting post I will look at this same IC entered at 31 DTE, one week later than this test.  Drop me a note if you'd like to see different data presented, and I'll do my best to incorporate your suggestions in the next post or two.


chartekat said...

Hi, a newbie to writing options. Just want to express appreciation for your gracious sharing of your experiences and backtesting.

Dave R. said...

Hi Chartekat,

Thanks for the great feedback...much appreciated!


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