Market Measures

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Market Measures

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There comes a time in every good trader’s career when they need to decide about scaling up. Two popular choices are to increase the risk per trade (increase deltas, widen wings, etc.) and to trade a greater number of contracts. Which is the preferred solution?

The Study:
  • SPY
  • 45 Days to Expiration
  • 2005 – 2018
  • 20 Delta Iron Condors with Varying Widths:
    • $1, $5, $10 Wide
  • Simulated Portfolio Performance with $1 Million Initial Account Value and Allocated 25% of the Capital All the Time.
  • Held to Expiration
Results:

By initializing a million-dollar portfolio and adjusting the width of the Iron Condors we can compare the two scaling approaches. The results reveal that the performance of a portfolio of $1 wide Iron Condors works well based on continuous luck, but in a longer time horizon it exhibits the greatest volatility with the lowest return. Instead, the portfolio of $10 wide Iron Condors has the greatest cumulative performance with the lowest portfolio volatility. When it comes time to scale up, increasing the risk per trade is a healthy alternative to increasing the number of contracts.

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