Sunday, December 7, 2014

Extra Long Put Iron Condor - RUT - 80 DTE

In this article I will show the automated backtesting results for four variations of an 80 days-to-expiration (DTE) RUT extra-long-put "no touch" IC.  I am writing this post in Brasilia, Brazil today (rather than the States).  I was hoping to write twice a week during this trip, but I've barely been able to write once each much for best laid plans!  Now on to the strategy results....

With the extra-long-put "no touch" IC structure, the call credit spread will be composed of 10 longs and 10 shorts, and the put credit spread component will be composed of 11 longs and 10 shorts...10 put credit spreads and an extra long put.  See my post Thoughts on Options Strategy Backtests for some background on my testing approach.  The prior RUT extra-long-put "no touch" IC backtest result post is here:
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.  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 extra-long-put "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.
(9) The there will be one additional long in the put spreads.

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 02/18/2012 expiration was initiated on 11/30/2011 and closed on 02/10/2012.  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, 02/18/2012, we can see that when the trade was initiated, the ATM IV was 35.  When the trade was closed, the cumulative non-compounded profit had grown to between $51.1k and $66.1k depending on the short delta of the variation of the strategy.

For these trades, the maximum reg-t margin requirement is between $15.3k and $18.3k 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 the 8 delta variation, which is the same pattern we noticed with the 66 DTE version.

Similar to the other "no touch" trades tested, there are some big drawdowns in these trades because of the lack of adjustments.  The extra long has helped with the drawdowns in the 8, 12, and 16 delta variations.  As we've seen before, 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 is greatest with the 16 delta variation.

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. In these heat maps for each of the different delta trades, we can see the amount of red (relative size of the negative returns) increasing as the delta of the short strikes is increased.

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 displayed on the horizontal axis are not displaying expiration dates even though the bars represent the ranges for trades by expiration month...this was done to reduce the number of axis labels on the graphs.

The top graph displays the P&L range for the 8 delta variation of the 80 DTE extra-long-put "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 increase from 8 to 20.

In the next post I will move on to the 38 DTE extra-long-put "no touch" SPX IC.

On a side note, my friend Jared at QuantConnect just let me know that they are planning to open source their platform.  Read the blog post on their open source plans at:

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