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Monday, May 29, 2017

Weekly Trade Summary: May 21 - May 27

Last week I closed for a loss, the June 23 butterfly that I had adjusted twice. The snap back rally after the May 17 drop was going to require a third upside adjustment to this trade last week. I decided to not fight this position any longer, with one month remaining until expiration. My trade activity is shown below:

(click to enlarge)

The trades associated with the June 23 butterfly are shown below:
  • Original Trade Entry: April 21 - BWB on the Jun 23 expiration (post)
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  • Adjustment: April 25 - added a second BWB on the Jun 23 expiration (post)
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  • Adjustment: May 10 - adjustment on first BWB on the Jun 23 expiration (post)
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I currently have 6 open trades, with expirations in June (2), and July (4):

(click to enlarge)

Total defined risk for these trades is at 42.2% of the account net liquidation value.

24 trades have been closed this year...14 wins and 10 losses. Return on the account for the year is at 3.28%.  Total win rate is at 58%.  The win rate on the core trades is at 70% and at the low end of the expected range. Of the 6 open trades, only 2 currently have a positive P&L.

Next week I may enter trades on the July 31, August 4, and August 18 expirations. If the SPX continues running up, I may adjust trades 27, 28, 29, and 30 in the table above.


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Saturday, May 20, 2017

Weekly Trade Summary: May 14 - May 20

Last week I entered one new SPX broken wing butterfly (July 21 expiration), closed out one DOTM BWB hedge for a small profit, expired one DOTM BWB for a tiny loss (~$6), and made small adjustments to two BWB. My trade activity is shown below:

(click to enlarge)

The adjustments removed any upside loss potential on the BWB on the June 16 and June 30 expirations.  These original two trades are shown below:
  • Original Trade Entry: April 3 - BWB on the June 16 expiration (post)
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  • Original Trade Entry: April 18 - BWB on the June 30 expiration (post)
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I currently have 7 open trades, with expirations in June (3), and July (4):

(click to enlarge)

Total defined risk for these trades is at 59.4% of the account net liquidation value.

23 trades have been closed this year...14 wins and 9 losses. Return on the account for the year is at 3.57%.  Total win rate is at 61%.  The win rate on the core trades is at 68% and at the low end of the expected range. Of the 7 open trades, all currently have a positive P&L.

I ran 10, 10 year backtests on my deep out of the money (DOTM) broken wing butterfly (BWB) hedges.  While they can work as a decent hedge if timed properly, over time they appear to lose money using my trading approach.  I closed out the last two of these hedges last week.

Next week I may enter trades on the July 28 and July 31 expirations.


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Saturday, May 13, 2017

Weekly Trade Summary: May 07 - May 13

Last week I entered two new SPX broken wing butterflies (July 14 and July 21 expirations), and adjusted the butterfly on the June 23 expiration. The activity is shown below:

(click to enlarge)

This is the second adjustment on the June 23 butterfly, and the associated trades are shown below:
  • Original Trade Entry: April 21 - BWB on the Jun 23 expiration (post)
(click to enlarge)
  • Adjustment: April 25 - added a second BWB on the Jun 23 expiration (post)
(click to enlarge)

I currently have 8 open trades, with expirations in May (1), June (3), and July (4):

(click to enlarge)

Total defined risk for these trades is at 60.6% of the account net liquidation value. This risk is broken down into the following groups:
  • 7.7% of net liq - DOTM BWB - hedges
  • 52.9% of net liq - core BWB
21 trades have been closed this year...13 wins and 8 losses. Return on the account for the year is at 3.50%.  Total win rate is at 62%.  The win rate on the core trades is at 68% and at the low end of the expected range. Of the 8 open trades, 6 are core and all of the core trades are currently up money.

I ran 10, 10 year backtests on my deep out of the money broken wing butterfly hedges.  While they can work as a decent hedge if timed properly, over time they appear to lose money using my trading approach.  I will phase out this style of hedge in the next few weeks.

Next week I may adjust trade #23, entered on 04/04/2017.  I will also likely enter a trade on the July 31 expiration.


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Tuesday, May 9, 2017

Iron Condor Results Summary

Over the last several months I have shared the results from an extensive set of backtests of SPX iron condors (IC). In all, I backtested 600,912 individual SPX IC trades entered at varying days to expiration (DTE) between January 2007 and September 2016. The prior articles can be found at the links below:

In this article, I'll review two key metrics collected from all of the backtests:
  1. Win Rate
  2. Normalized P&L Per Day

Win rate is a common metric to analyze, but P&L per day is less obvious.  P&L per day gives us a very clear view of the expected return by day for a given strategy variation. We've already seen in the prior posts how the number of days in trade (DIT) increases as we enter trades at higher days to expiration (DTE). As a very rough rule of thumb, it takes about half the DTE to collect 50% of the credit (although this changes with short strike delta!). From this normalized P&L per day value we can derive the average return per trade, as well as the average return per year.

Before we get into the results, I need to describe the format of the heat-map tables below. First, each IC wing width is presented in a separate table, starting with the 25 point wing ICs.

Next, the first column lists the strategy variation, including the exit used. This column uses the strategy description nomenclature that I used in the last several months worth of articles in the links above.

Next, there are four groups of seven columns. Each group corresponds to a different short strike delta, and each of the seven columns in the group corresponds to a different DTE starting point.


Win Rate

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It's clear that the 8 delta short strike has the highest win rates from a delta perspective.  Also, 80 DTE has the highest win rate of all of the DTE tested.  The 50% profit taking level is the winner for profit taking exits. We also see that the larger wing widths have slightly higher win rates. Let's think about each of these points:
  • Both the smaller delta and higher DTE end up making a wider "tent" for the IC, which gives the market more room to run before a loss exit is triggered.
  • Taking profits at 50% versus 75% or expiration has you out of the trade sooner...reducing the chance that the market can move against your position.
  • The larger wing width, creates a larger credit, and at 75 points approximates a naked strangle. With 75 point wings, you get the margin relief (defined risk) from the long options that you don't get with a strangle. Since the longs are so far away from the short strikes, this structure has greater theta decay than ICs with 25 and 50 point wings.

It's interesting to note that the win rate for the same short strike delta increases with increasing DTE. Recall, as DTE increases the implied volatility (IV) for the same delta option increases.  For example, an 8 delta put at 38 DTE might have an IV of 14.15% while an 8 delta put at 80 DTE might have an IV of 17.44%. Using these two examples of IV we calculate the expected one standard deviation move of the underlying in percent:
  • 0.1415  x  sqrt(38/365)  =  0.045656   (+/- 4.57%)
  • 0.1744  x  sqrt(80/365)  =  0.081648   (+/- 8.16%) 
Note: IV from TOS for each of these option chains is lower at approximately 11.5% and 12.6% respectively

Based on these expected moves, it's worth considering a couple of questions.  How does actual market movement over 40 days (half of 80 DTE) compare with the expected move?  How do the actual market moves over 19 days (half of 38 DTE) compare with those over 40 days?

Finally, I have two tables showing the top 30 and bottom 30 IC variations in terms of win rate. The top variations are dominated by higher DTE, 75 point wings, 8 delta short strikes, profit taking at 50%, and no loss exit. The bottom 30 are dominated by mid-range DTEs, 25 point wings, 20 delta short strikes, extra long put (EL) structures, with loss taking at 100% and no profit taking exit (take the trade to expiration).

(click to enlarge)


P&L Per Day
Recall from the prior articles that all of the P&L per day numbers are normalized. 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.

(click to enlarge)

There are a few high level trends from these tables of normalized P&L % per day values:
  • The lowest returns occur with the EL structure.  The extra long put negatively impacts the theta decay of the structure, but this negative impact decreases (as we'd expect) as wing width increases
  • The next lowest returns occur with the DN structure. Since there are fewer call credit spreads than put credit spreads in this structure, there is lower theta decay than with the ST structure
  • The ST structure has the highest normalized P&L % per day numbers
  • From a short strike delta perspective, the lowest returns per day occur at 8 delta, and the highest returns occur in the 16 to 20 delta range
  • The 75 point wing structures have the lowest returns, and the 25 point wing structures have the highest returns
  • From a DTE perspective:
    • The DN structures' returns are highest in the 38 to 45 DTE range
    • The EL structures' returns are highest in the 73 to 80 DTE range
    • The ST structures' returns are highest in the 73 to 80 DTE range, but there is also a second high return clustering in the 38 to 45 DTE range

The return distributions related to structure and DTE, suggest that in the 38 to 45 DTE range, the market has tended to trend up or stay flat.  Hence the clustering of higher daily return numbers for the DN structure in the 38 to 45 DTE range. Additionally, the data suggest that in the 73 to 80 DTE range the market has tended to stay flat or drop. The EL structure shows higher returns in longer duration trades, indicating that the extra long put has some benefit in the 73 to 80 DTE range. 

Similar to the win rate section, I have two tables showing the top 30 and bottom 30 IC variations in terms of normalized P&L per day. The top variations are dominated by the standard (ST) structure with 25 point wings, 20 delta short strikes, profit taking at 50%, and a range of loss exits. The bottom 30 are dominated by the extra long put (EL) structure with 25 point wings, 20 delta short strikes, with no profit taking exit (take the trade to expiration).

(click to enlarge)

In the next article, we'll narrow down the list of 3024 strategy variations, to a list of strategies that look trade-able.  I'll remove the variations without profit and loss exits, and look at win rate, normalized P&L per day, largest loss, and profit factors.

Also, over the next several days I'll use Twitter to share other versions of the tables above, organized around DTE groupings instead of grouping by short strike delta..


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Sunday, May 7, 2017

Weekly Trade Summary: Apr 30 - May 06

Last week I entered one new SPX broken wing butterfly in the July 7 expiration. The activity is shown below:

(click to enlarge)

I currently have 6 open trades, with expirations in May (1), June (3), and July (2):

(click to enlarge)

Total defined risk for these trades is at 44.9% of the account net liquidation value. This risk is broken down into the following groups:
  • 7.8% of net liq - DOTM BWB - hedges
  • 37.1% of net liq - core BWB
21 trades have been closed this year...13 wins and 8 losses. Return on the account for the year is at 3.50%.  Total win rate is at 62%.  The win rate on the core trades is at 68% and at the low end of the expected range. Of the 6 open trades, 4 are core and 2 of the core trades are currently up money.

I ran 10, 10 year backtests on my deep out of the money broken wing butterfly hedges.  While they can work as a decent hedge if timed properly, over time they appear to lose money using my trading approach.  I will phase out this style of hedge in the next few weeks.

Next week I plan to adjust trade #26, entered on 4/21/2017.  I will also likely enter trades on the July 21 expiration and the July 14 expiration.


Follow my blog by email, RSS feed or Twitter (@DTRTrading).  All options are available on the top of the right hand navigation column under the headings "Subscribe To RSS Feed", "Follow By Email", and "Twitter"