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Portfolio Allocation for Iron Condors (Part 1)

Market Measures

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

We recently had a 3 part series on Portfolio allocation for Strangles based upon a hypothetical portfolio of $1 Million Dollars. We learned in that segment that by using the combined strategy of managing winners and managing early that a trader would only need to allocate 16% of available capital to match a S&P 500 buy-and-hold strategy. Many tastytraders wrote in asking if we could create a similar segment for defined risk strategies. Now while with some defined risk strategies, such as Vertical Spreads, we generally just let the trade we set up at order entry play itself out, Iron Condors, especially wide ones, act much more like an undefined risk trade such as a Strangle. So what if we created a portfolio and allocated different percentages toward Iron Condors? How would they perform?

Our first study was conducted in the SPY (S&P 500 ETF) using data from 2005 to the present. We chose the option expiration cycle closest to 45 days to expiration (DTE) and sold wide Iron Condors consisting of a 16 Delta Put and a 16 Delta Call and bought the 5 Delta wings. We established a new position only after the previous one was closed. We compared strategies of allocating 15%, 20%, 25%, and 30% of our available capital and held the trade to expiration. We then compared the strategies to a 100% buy-and-hold strategy in the SPY.

A results graph showed that without any management, selling Iron Condors outperformed the long SPY strategy if we committed 25% or more of our capital. A second results graph of selling Iron Condors and managing winners was displayed. The graph showed that managing winners improved our performance by reducing the volatility of our results.

Tom noted, “It wasn't the same as the results from the undefined risk trades, where by managing them, you outperformed by hundreds of a percent. So what we've been saying about defined risk trades is probably pretty accurate. When you get to a certain point, you can manage the winners but you don't really want to mess with the trade. Adjusting and rolling the trade we didn't do, and you still came out okay."

For more information on Portfolio Allocation see:

Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the results of our study on Portfolio Allocation for wide Iron Condors and to learn another benefit of managing winners.

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