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Market Measures

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ROC and Volatility

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.

Return on capital is a performance metric that captures the potential profits of a trade relative to the amount of capital used. Narrow iron condors, with their low buying power requirements typically exhibit very high potential return on capital. However, because of their variability in returns, there is a significant difference in expected versus realized return on capital. In this piece, the Research Team explores two ways to reduce this variability in return on capital.

The Study:
  • SPY
  • 2005 – 2018
  • 45 Days to Expiration
  • Held to Expiration
  • Short 20 Delta $1 Wide Iron Condor

Two ways to reduce the volatility of iron condors are to widen the wings of the strategy and proactively manage the position. Widening the wings of the iron condor from $1 Wide to $5 wide reduced the annualized return on capital volatility from 613% to 370%. Additionally, managing the trades at 21 days to expiration further reduced the annualized return on capital volatility.

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