An Iron Condor behaves in some ways like an undefined risk trade such as a Strangle and we try to manage our winners at 50% of max profit just like a Strangle. Unlike a Strangle, because an Iron Condor is essentially a short Call Vertical Spread and a short Put Vertical Spread we know our maximum risk (the width of the largest spread minus the credit received) at order entry. Knowing that max risk at order entry, we can compare historical P/Ls and potential profits to that risk. What do you think the results would be?
Our 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 Iron Condors comprised of a short 30 Delta Strangle with long 16 Delta wings. We then managed at 50% of max profit if possible and compared managing winners versus strictly holding to expiration and then all Implied Volatility (IV) environments to those with an IV Rank (IVR) over 50.
A table displayed the results comparing holding to expiration versus managing at 50% of max profit when possible. The table included the average strike width, average max risk, win rate, average P/L, average loser and Return On Risk (ROR). Managing winners significantly outperformed in win rate, average P/L and return on risk. It was slightly worse for largest loss. A second results table was displayed comparing Iron Condors in all IV environments and when IV Rank was above 50. The table again included the average strike width, average max risk, win rate, average P/L, average loser and return on risk. The table showed that even though the max potential risk increased in high IV Rank, the average P/L doubled resulting in a dramatically higher return on risk (5%-9.5%).
For more information on Dynamic Iron Condors see:
tasty BITES from September 2, 2015: "Iron Condors | Fixed vs Dynamic"
Strategies For Your IRA from March 14, 2016: "SPX Dynamic Iron Condors"
Strategies For Your IRA from May 24, 2016: "Dynamic Iron Condors: Capital Allocation"
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the important takeaways and the results of our study on Dynamic Iron Condors and Return On Risk.
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