Monday, June 30, 2014

Iron Condor Backtest - SPX - 24 DTE

Now that we have finished our baseline tests and mid-level analysis of the "no touch" iron condor (IC) on the Russell 2000 Index (RUT), we will turn our attention to the S&P 500 Index (SPX).

In this blog post we will look at the automated backtesting results for four variations of a 24 days-to-expiration (DTE) SPX "no touch" IC.  As with the prior tests on the RUT, 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.

As with the prior RUT backtests, this first series of SPX backtests will be "no touch" tests; there will be no adjustments during the trades  In addition, there will be no hedging to start the positions leaning one direction or another.  Many of these settings are available in the backtester, but we will only look at this baseline IC case initially.  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 24 DTE, 22 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) S&P 500 Index options
(6) Four 24 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).  This number was 20 for the RUT, but had to be increased to 25 for the SPX due to options availability at longer DTE.

The equity curves for each of the four delta 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.  Because of the large losses in the first two years, the time axis and IV are a bit hard to read...

If I pick a random expiration date, for example 12/17/2011, we can see that when the trade was initiated, the ATM IV was 32.  When the trade was closed, the cumulative non-compounded profit had grown to between $16.4k and $27.7k depending on the short delta of the variation of the strategy.

For these trades, the maximum reg-t margin requirement is between $22.8k and $24.2k assuming your brokerage only margins 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.  The 8 delta trade had the highest margin requirement, while the 20 delta trade had the lowest margin requirement.  The margin difference is related to the difference in the size of the credits received.  Higher delta equals larger credit; lower delta equals smaller credit.

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 winning trades increases as the size of the short deltas decreases..the further away from ATM, the higher the win rate.  The combination of shorter DTE and closeness of the short strikes makes the higher delta condors have a lower win rate.  Unlike this same strategy on the RUT 24 DTE, the non-compounded AGR on the SPX actually decreases as the delta of the short strike increases...the opposite of what we observed on the RUT.

In the heat maps, we can see the performance by expiration month of each of the individual trades of each of the four delta variations.  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 24 DTE "no touch" IC.  Even with the short duration of these trades, 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 SPX, in percent terms during the life of each trade.  The bullish bias of the US markets is evident even in this short duration trade.

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 drops.

The next three graphs show the P&L range for the 12 delta, 16 delta, and 20 delta variations of this 24 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 post I will move on to the 31 DTE "no touch" SPX IC.  Drop me a note if you'd like to see different data presented, and I'll do my best to incorporate your suggestions in upcoming posts.


Anonymous said...

Interesting research here - look forward to new posts. You are closing trades at 8 DTE - correct? What's the rationale behind that? Also, where did you get your historic options data?

Dave R. said...

Thanks for your comment.

I answered a similar (the same?) question on another of my posts. Please see my answer at:

Thanks again,

Anonymous said...

Yes, that was my original comment, I could not find where I posted it, so I did not see the reply - thanks!

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