Monday, October 13, 2014

Delta Neutral Iron Condor - RUT - 80 DTE

In this article we will look at the automated backtesting results for four variations of a 80 days-to-expiration (DTE) RUT delta neutral "no touch" Iron Condor (IC).  See my post Thoughts on Options Strategy Backtests for some background on my testing approach, and my other post Delta Neutral Iron Condor for more detail about the structure of this trade.  The prior RUT delta neutral IC backtest results posts can be found at:
I am now spending part of my time each month in Brazil (I'm in Brazil right now) working with a client and this may cause long gaps between posts during the next several months...I apologize in advance for the time between posts...

As with the prior backtests, the short strikes for both the call credit spreads and put credit spreads will be at approximately the same delta.  These backtests will be "no touch" tests, meaning there will be no adjustments during the trades  Lastly, these trades will be started with the position delta close to zero (delta neutral).  This will require the number of call credit spreads to be reduced until the position delta approaches zero.  The setup details are shown in the table below:

(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 80 DTE, 78 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 80 DTE delta neutral "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).
(8) The call spreads will contain an equal number of long and short options.  The quantity of call spreads at trade initiation will range from between 5 and 10.  The actual quantity selected by the backtester will result in a position delta that is close to 0.  For example 5 call spreads and 10 put spreads at initiation, or 6 call spreads and 10 put spreads at initiation, etc.

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, not trade initiation or closing dates.  For example, the trade corresponding to the 12/17/2011 expiration was initiated on 09/28/2011 and closed on 12/09/2011.  In all of the charts below, I will show data for trades by their expiration date.

If I look at this same expiration date in the chart below, 12/17/2011, we can see that when the trade was initiated, the ATM IV was 46.  When the trade was closed, the cumulative non-compounded profit had grown to between $31.4k and $43.2k depending on the short delta of the variation of the strategy.

For these trades, the maximum reg-t margin requirement is between $16.0k and $18.6k 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).  The Sharpe and Sortino ratios are the highest for the 20 delta variation.

Similar to the other "no touch" trades tested, there are some big drawdowns in these trades because of the lack of adjustments.  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.  The non-compounded AGR decreases as the delta of the short strike decreases.

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.

The next four graphs show the P&L range for the four delta variations of this 80 DTE IC strategy.  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 the P&L range for the 8 delta variation of the 80 DTE delta neutral "no touch" IC.  You can see that when a trade closes profitably the range is mostly on the positive side of the graph.  You can also see the increase in P&L volatility as the delta increases from 8 to 20.

In the next post I will move on to the 38 DTE delta neutral "no touch" SPX IC.

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