Here is a new weekly Iron Condor on SPX, which requires less margin and a higher probability of profit than our previous version.
Happy Fourth of July to all our readers!
I have been researching alternatives to the "test kitchen" SPX weekly Iron Condor for a version that does not require as much initial margin. For those of you who have been following this trade, the strategy called for 25 point wings on the calls, and 30 points on the puts. This may have presented a challenge for some traders, as there are brokers who will not allow unbalanced wings. This new Iron Condor has 10 point wide wings on both sides, and is also further away from the underlying price at the time of entry which makes it a more desirable trade given the intra-day volatility we have been experiencing in recent weeks and months.
I have been backtesting and paper trading this strategy for the last four weeks; it is NOT recommended to trade it live yet. However, I wanted to share the guidelines with you so that you can begin backtesting and paper trading it on your own. The results are outlined below:
SPX Weekly Iron Condor Results
Thus far, for the 4 weeks that I have traded this strategy, there was one losing week. The net gain for the 4 week period, including the losing week, was 4.4% per week. This gain on an annualized basis is very respectable for any strategy.
The basic guidelines for this trade are:
Entry Day: Thursday or Friday for the next week's expiration cycle. As with our other weekly strategies, if SPX has moved +/- more than a one day, one standard deviation move, do not enter the trade until the movement is less than a standard deviation. If it remains over a one standard deviation, do not enter the trade. As of this writing, the one-day, one standard deviation move is 14 points.
Time of entry: Exact time is trader's choice; wait at least the first hour after the open before entering.
Trade entry: Sell short Call and short Put with delta of approximately 10. Buy long call and long put 10 points above and below short strikes.
Minimum Credit: Credit must be at least $1.25 to enter the trade
Maximum Risk/Margin: Width of wings less credit received. Using the example of the minimum credit of $1.25, the maximum risk would be $875 ($1,000 less $125). Some may view this as a very poor risk reward ratio, however, the short strike at a delta of 10 represents a 90% probability that the strike will expire out the money.
The graph below illustrates a sample position as of today (July 4, markets are closed). The strikes and credit will likely be different at the time of entry; this is just intended to give you an idea of the risk graph of this wide iron condor:
SPX Weekly Iron Condor Example
The strikes on this example are -1655/+1665 Call, -1555/+1545, both a .10 delta as of this writing. The credit is currently 1.60. There are 100 points between the two short strikes, so you can visualize how wide the "tent" is for this trade. In this example, using the credit of $1.60, the maximum risk/margin is $840 ($1,000 less $160). Target profit is $120, which represents 14.2% of the total risk.
Target gain: 75% of credit received.
Max loss: 100% of credit received.
- The trade is adjusted when the delta of the short strike increases to a delta 10 higher than at the time of entry. For example: If the delta of the short strike at entry was .10, the adjustment trigger delta would be when the short strike delta reaches .20.
- At the adjustment trigger point, the spread on the threatened side is rolled out 10 points for a debit.
-After adjusting, the trader has two choices, depending on your trading style and trade plan. As the debit to roll the threatened side will reduce the amount of credit remaining in the trade, the target gain can simply be revised to 75% of the new, lower credit. Or, if the trader wants to maintain the original target gain, additional contracts can be added at the new strikes. It is not recommended to increase the size of the position by more than 50%. For example, if the original position was for 2 contracts, the position could be increased to 3 contracts. Obviously increasing the size also increases the overall risk in the position.
In closing, I want to stress that it is not recommended to place this trade live for next week's cycle; but an excellent opportunity to backtest it or paper trade to start before trading it live to get a feel for this version of the 10 point wide weekly Iron Condor. If market conditions are favorable on Friday, I will put on a position (paper) and post the trade entry details. As of today, however, futures are surging upwards with good news from the ECB, so it's impossible whether to predict how the market will react when things open tomorrow morning. If SPX moves more than 14 points in either direction, we will not enter this position.
As always, stay keen on your risk management and trade carefully,