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Backtesting Iron Condors in SPX

Market Measures

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We like using 1 Standard Deviation Strangles as a great way to short option premium but some don't like the idea of undefined risk so by buying a further out-of-the-money call and put they turn the trade into an Iron Condor (IC) which is another type of Delta Neutral strategy which benefits from Theta (time decay). While we usually use the SPY (S&P 500 ETF) in our studies some prefer to use the SPX. The SPX has less liquidity but the commission charges are less because of the much higher notional value of the contract. So in the SPX, which type of Iron Condors perform better?

Our study of Iron Condors in the SPX had a time frame of from 2005 to the present. We tested Iron Condors with the short wings having either a 0.16 Delta or a 0.40 Delta (the 16 Delta means they have a 16% chance of falling in-the-money (ITM) while the 40 Delta options have a 40% chance). The long wings had a 0.05 Delta for both Iron Condors. We tested them when carried to expiration and also when we were able to manage winners at 50% of max profit.

The initial credit was an average of about 3.5 times greater for the 40 Delta ICs as the 16 Delta ICs. The largest max loss was about 50% greater for the 40 Delta ICs. A table showed that the percentage of profitable trades was significantly higher for the 16 Delta ICs both when carried to expiration or when managed at 50% (and managing at 50% was a significant improvement for both ICs). The average P/L though were significantly higher for the 40 Delta ICs.

For more on Iron Condors see:

Watch this segment of Market Measures with with Tom Sosnoff and Tony Battista for the valuable takeaways and the results of our study comparing different Deltas on Iron Condors in the SPX.

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