When Should You Exit Your Iron Condor?

During the last several posts, we expanded our Iron Condor exit analysis to include results where trades were held to higher loss thresholds.  You can review both the first and second sets of articles at the following pages:

• Dynamic Exit Iron Condor Articles
• High Loss Threshold Iron Condor Articles

This post will review the combined trade metrics from both sets of articles for the Iron Condors on the RUT.  I've also expanded the range of all of the results through the April 2015 expiration.  We will look at how the high loss threshold strategy variations compare to the lower loss threshold strategy variations, as well as the different starting structures.  As a bit of review, the first series looked at the following three starting structures for iron condors:

1. Standard (STD) - an iron condor with an equal number of put and call credit spreads.
2. Delta Neutral (DN) - an iron condor with fewer call credit spreads than put credit spreads in order to create a position delta near 0.  This structure performs better in an advancing market.
3. Extra Long Put (EL) - a Standard iron condor with one additional long put for every 10 put credit spreads.  This structure performs better in a declining market.

For each of these three starting structures, we looked at iron condors with different delta short strikes (8, 12, 16, and 20 delta) at different days to expiration (38, 45, 52, 59, 66, and 80).  For each of these combinations I ran backtests from the January 2007 expiration through the April 2015 expiration, with the following dynamic exits:

1. Exit at 8 DTE
2. ML40% - exit when the loss is equivalent to 40% of the margin for the position OR 8 DTE
3. BSP - exit when the market is below the strike of the short put (BSP) OR 8 DTE
4. 0.6:0.6 - exit if the trade has a loss of 60% of its initial credit OR if the trade has a profit of 60% of its initial credit OR 8 DTE
5. 0.6:0.9 - exit if the trade has a loss of 60% of its initial credit OR if the trade has a profit of 90% of its initial credit OR 8 DTE
6. 0.7:0.9 - exit if the trade has a loss of 70% of its initial credit OR if the trade has a profit of 90% of its initial credit OR 8 DTE
7. 0.8:0.9 - exit if the trade has a loss of 80% of its initial credit OR if the trade has a profit of 90% of its initial credit OR 8 DTE

For the Standard (STD) structure only, I additionally analyzed the results for the following dynamic exits:

1. STD - NA%:NA% - exit at 8 DTE -- this is  the same as item 1 above.
2. STD - NA%:50% - exit if the trade has a profit of 50% of its initial credit OR 8 DTE.
3. STD - 100%:50% - exit if the trade has a loss of 100% of its initial credit OR if the trade has a profit of 50% of its initial credit OR 8 DTE.
4. STD - 200%:50% - exit if the trade has a loss of 200% of its initial credit OR if the trade has a profit of 50% of its initial credit OR 8 DTE.
5. STD - 200%:75% - exit if the trade has a loss of 200% of its initial credit OR if the trade has a profit of 75% of its initial credit OR 8 DTE.
6. STD - 300%:50% - exit if the trade has a loss of 300% of its initial credit OR if the trade has a profit of 50% of its initial credit OR 8 DTE.
7. STD - 300%:75% - exit if the trade has a loss of 300% of its initial credit OR if the trade has a profit of 75% of its initial credit OR 8 DTE.
8. STD - 400%:50% - exit if the trade has a loss of 400% of its initial credit OR if the trade has a profit of 50% of its initial credit OR 8 DTE.

Before we get into the results, I should probably describe the table format that I am using to display the results.  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 posts.  Next, there are four groups of six columns.  Each group corresponds to a different short strike delta, and each of the six columns in the group corresponds to a different DTE starting point.  Hopefully this makes sense, but feel free to submit a comment for this post if you'd like me to clarify the format / nomenclature further.

The first table, shows the average normalized P&L per day by delta, DTE, and strategy.  It's easy to see that the highest daily returns are concentrated in the STD starting structure with  20 delta shorts, and a starting DTE in the 59 to 66 range.  Also, the shorter DTE (38 - 45) with the higher loss thresholds were another area of high daily returns.

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The second table shows the average P&L per trade by delta, DTE, and strategy.  It's clear from this table that the highest overall returns were concentrated in the 16 and 20 delta variations at 59 to 80 DTE.  The 12 delta short strike variations also exhibited this same DTE trend.  Additionally, as a group, the 20 delta, 66 DTE variations with lower risk:reward exits had the highest returns.

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The third table, below, shows the win percent / win rate by delta, DTE, and strategy.  The highest win rates are concentrated with the 8 delta short strike strategy variations, and also in the STD high loss strategy variations (across deltas).  Basically, the greater your tolerance for unrealized losses, the higher your win rate...this was evident by the variations that were the darkest green in the table below.  Another interesting point is that at 8 delta, the DTE did not have a big impact on the win rate if your risk tolerance was high.

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In the fourth table, we see the Sortino Ratio by delta, DTE, and strategy.  The highest Sortino's were present with the 59 to 66 DTE variations with the low risk:reward exits...this trend was persistent across starting structure and short strike deltas...but strongest at 8 delta.

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The fifth table shows the profit factor metric by delta, DTE and strategy.  The highest profit factors were present in the 59 to 66 DTE strategy variations, as evident by the presence of the dark green cells below.  In addition, the 8 delta short strike strategy variations have the highest profit factor numbers.  At 8 delta, the 38 and 45 DTE variations also were an area of profit factor strength.

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Lastly, table six displays the standard deviations of returns by delta, DTE, and strategy.  In this table, the lower the SD number, the darker green the cell in the table.  The lowest standard deviations of returns were concentrated with the 8 delta strategy variations.  The low risk:reward variations were the strongest at 8 delta, and this strength extended into the other short strike deltas.

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So when should you exit your Iron Condor?  As usual, it depends on what metric is most important to you.

Highest Return Per Day / Per Trade - I would concentrate on the STD structure, 59 to 66 DTE, 20 delta short strike variations with a low risk:reward exit: STD-0.6:0.9, STD-0.7:0.9, STD-0.8:0.9.

Highest Win Rate - I would look at the 8 delta short strike variations, and a trade imitation at 59 to 80 DTE.  My preference here, would be for one of the following exit variations: STD-200%:50%, STD-200%-75%, STD-300%-50%, or STD-300%-75%.  There are other variations that work as well, but these are my favorites in this category.

Sortino Ratio - I wouldn't select a trade solely on the Sortino Ratio.  I would look for the intersection of Sortino and returns, for example.   In this case, the same variations that were selected in the highest return per day / per trade category also have decent Sortino numbers.

Profit Factor - I would use the same approach for Profit Factor as I used for Sortino Ratio.  I would look for the intersection of high Profit Factor numbers and some other criteria (for example daily returns).

Standard Deviation of Returns - Any of the starting structures and DTE at 8 delta have low standard deviations of returns...as long as a risk reward exit is used.  Take your pick here...but I would gravitate towards the STD low risk:reward variations.

There are really two main trade approaches that jump out at me when reviewing these results:

1) You can either use high delta short strikes (20 delta) in the 59 to 66 DTE range - exited early (60% to 80%) when there is a loss

OR

2) You can use lower delta short strikes (8 delta) in the 59 to 66 DTE range - and allow your unrealized (and possibly realized!) losses to get fairly large (200% to 300%) during the life of the trade.  

Either of these general approaches will work.


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RUT Iron Condor - High Loss Threshold Results Summary

Over the last six blog posts we looked at eight different exit approaches for a standard RUT iron condor with 20 point wings.  These exits included:

1. STD - NA%:NA% - exit at 8 DTE.
2. STD - NA%:50% - exit if the trade has a profit of 50% of its initial credit OR 8 DTE.
3. STD - 100%:50% - exit if the trade has a loss of 100% of its initial credit OR if the trade has a profit of 50% of its initial credit OR 8 DTE.
4. STD - 200%:50% - exit if the trade has a loss of 200% of its initial credit OR if the trade has a profit of 50% of its initial credit OR 8 DTE.
5. STD - 200%:75% - exit if the trade has a loss of 200% of its initial credit OR if the trade has a profit of 75% of its initial credit OR 8 DTE.
6. STD - 300%:50% - exit if the trade has a loss of 300% of its initial credit OR if the trade has a profit of 50% of its initial credit OR 8 DTE.
7. STD - 300%:75% - exit if the trade has a loss of 300% of its initial credit OR if the trade has a profit of 75% of its initial credit OR 8 DTE.
8. STD - 400%:50% - exit if the trade has a loss of 400% of its initial credit OR if the trade has a profit of 50% of its initial credit OR 8 DTE.

We applied these exits to iron condors with different delta short strikes (8, 12, 16, and 20 delta) at different days to expiration (38, 45, 52, 59, 66, and 80).  Please see the following links for the background information associated with the results in this post:

• Iron Condor Series - Higher Loss Thresholds
• RUT Iron Condor - High Loss Threshold - 38 DTE
• RUT Iron Condor - High Loss Threshold - 45 DTE
• RUT Iron Condor - High Loss Threshold - 52 DTE
• RUT Iron Condor - High Loss Threshold - 59 DTE
• RUT Iron Condor - High Loss Threshold - 66 DTE
• RUT Iron Condor - High Loss Threshold - 80 DTE

Let's review the equity curves for four of the combinations listed above, to get a qualitative sense of the performance.  Recall that the y-axis scale is the same for all of the equity curves (-200% to 1000%), except for the 16 and 20 delta variations of the 66 DTE trade (-200% to 1400%).  The thumbnails are small, but larger images will be displayed if you click on them.

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With these equity curves as a qualitative reference, let's look at the associated trade metrics.  The four tables below show the top 20 strategy variations (out of 192) in terms of selected metrics.

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The table above shows the top 20 strategies ordered by highest normalized average P&L per day.  The 16 delta short strike trades were dominant in this category, with 10 of these strategies being associated with 16 delta short strikes.  There were 6 at 20 delta and four at 12 delta.  In terms of DTE for the top 20, there were 5 at 66 DTE, 7 at 59 DTE, and 8 at 45 DTE.  Taking losses at 200% or 300%, and taking profits at 50% was how the trades with the highest normalized average P&L per day were traded.

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The table above shows the top 20 strategies with the highest normalized average P&L per trade.  The 66 DTE, 16 and 20 delta variations took most of the top spots, as we would expect based on the equity curves.  These top strategy variations tended to take losses at 200% or 300% and take profits at 75%, or simply carry the trades to 8 DTE without profit or loss exits.

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The table above lists the top 20 strategies ordered by their win rate.  The top eight strategies all had win rates of 93%, short strikes at 8 delta, profit taking at 50%, and large loss exits (300%, 400%, or no loss limit at all (NA)).  Most of the variations with win rates of 90% or more, typically had these features in common.

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The table above lists the top 20 strategies ordered by their Sortino Ratio.  Eleven of these top 20 strategies were 66 DTE versions, with another 5 at 59 DTE.  Nine of the top 20 were 8 delta short trike variations.  Eleven took profits at 75% of the credit received.

Deciding on a specific RUT iron condor exit strategy depends on your goals:

• Want a high Sortino Ratio - go with an 59 to 66 DTE, 8 delta short strikes, managing the profits at 75%, and managing the loss at 200%.  Historically, this approach has averaged more than 5% per trade with a win rate at 87%.


• Want a win rate - go with an 45 to 66 DTE, 8 delta short strikes, managing the profit at 50% and the loss at 400%.  Historically, this approach has averaged around 4% per trade with a win rate of 93%.


• Want the highest returns / return per trade - go with a 66 DTE, 16 or 20 delta short strikes, managing the profit at 75%, but the loss at either 200% or 300%.  Historically, this approach has averaged over 11% per trade with a win rate of between 78% and 85%.


• Want the highest returns per day - go with a 45 DTE, 16 delta short strikes. managing the profit at 50% and the loss anywhere from 200% to 400%.  Historically, this approach has averaged over 6% per trade with a win rate of 83%.

In the next post, we will look at an even larger summary of RUT iron condor performance.

NOTE: Since the original posting, I have updated the tables above to exclude the metrics that were shown in dollar ($) terms.  See the comments section for the explanation.


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RUT Iron Condor - High Loss Threshold - 80 DTE

This post looks at a standard (STD) one-lot iron condor on the Russell 2000 Index (RUT), initiated at 80 days-to-expiration (DTE).  The results in this post were derived from approximately 3200 individual trades entered by the backtester.

For background on the setup for the backtests, as well as the nomenclature used in the charts and tables below, please see the introductory article for this series: Iron Condor Series - Higher Loss Thresholds

In the trade metrics tables, I have highlighted some of the rows to indicate values that are in the upper half of the readings.  One of the metrics to note is the average P&L per day in percentage terms (Trade Details (%) - Avg. P&L / Day).  This is a measure of the P&L per day normalized to the maximum margin required for that trade run...it tells us the effectiveness of theta with respect to our margin requirement.

8 Delta Short Strikes

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For the 80 DTE, 8 delta RUT iron condors, the top exit approaches indicated by the metrics were: 200%:75%, 300%:50%, and 300%:75%.


12 Delta Short Strikes

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For the 80 DTE, 12 delta RUT iron condors, there were no clear winners in terms of metrics.  The top exit approaches indicated by the metrics appear to be: NA%:NA%, 200%:75%, 300%:50%, and 300%:75%.  Note: the NA%:50% and 400%:50% variations have nearly identical equity curves in the chart above.


16 Delta Short Strikes

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For the 80 DTE, 16 delta RUT iron condors, there were again no clear winners in terms of metrics.  The the top exit approach indicated by the metrics appears to be the 300%:75% variation.  Note: the NA%:50% and 400%:50% variations have nearly identical equity curves in the chart above.


20 Delta Short Strikes

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For the 80 DTE, 20 delta RUT iron condors, there were again no clear winners in terms of metrics.  Note: the NA%:50% and 400%:50% variations have nearly identical equity curves in the chart above.

With the 80 DTE tests, the highest average P&L per day readings occurred with the 16 delta and 20 delta short strike variations.  In the next post I will summarize the results from the last six blog posts.


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