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Portfolio Allocation For Wide ICs - Part 2

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.

The Market Measures from October 14, 2016, "Portfolio Allocation for ICs: Part 1" demonstrated that a premium selling using Iron Condor outperformed a passive buy-and-hold strategy in SPY. That was even before managing winners. Managing winners improved the results. This segment will examine the strategy of closing the trade by 21 days left and also combining that strategy with managing winners on defined risk trades. Will either improve performance even more?

Our study was conducted in the SPY from 2005 to present. Using a portfolio of $1 Million in initial capital we consistently allocated a varying percentage of the current account value into Wide Iron Condors. Our Iron Condors consisted of our usual one Standard Deviation (SD) Strangle comprised of a short 16 Delta Call and short 16 Delta Put combined with 5 Delta wings. We chose the option expiration cycle closest to 45 days to expiration (DTE). We opened new positions only after we closed the past position. We did not exceed a 25% allocation of our capital to the strategy.

A results graph compared buy-and-hold strategy in the SPY to wide Iron Condors held to expiration, managed at 50% of max profit, closing at 21 days to expiration and a combined strategy. The graph showed that active management outperformed the passive buy-and-hold SPY strategy consistently and that the combined strategy of managing winners and closing at 21 days to expiration produced a return that was 70% better than passively holding the SPY. A table comparing the daily portfolio volatility of long SPY, managing wide ICs at 50%, closing wide ICs at 21 days to expiration and a combined strategy was displayed. The table showed that the combined strategy resulted in a 45% lower portfolio volatility risk than the passive SPY strategy.

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 how both managing early performed and combining managing early with managing at 50% performed.

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