11/16 Simple study on Iron Condors

A few weeks ago I started to dissect the market price action and looking for early signs of trouble, what could indicate the beginning of a thunderstorm, even if it was a quick one.. I looked at price action, and more specifically at the 5-day price spike charts, It was my feeling that this one chart could give me some early warning.

So, after looking at those charts for quite some time, I realized that in several occasions, the 5-day price spikes would give me a heads up of a potential trend developing. Like any trend following signal, there are false alarms, but I felt there were enough good signals to warrant further investigating.

So, I started backtesting a simple Iron Condor strategy coupled with the 5-day charts: The following were my testing rules:

1) Entry
1.1) Enter 1/2 of the position with 35 days to expiration
1.2) Enter the second 1/2 on the same day if, and only if, you don't have 2 or more days in a row of strong action on the 5-day profile

2) Exit:
2.1) Exit as soon as 15% or more is reached
2.2) Exit if down by 15%
2.3) Exit after 2 days in a row of strong action in the 5-day profile

I defined "strong action" as any price spike of +/- 0.5 on the 5-day chart. I've updated the profile I post every day to show those days in orange.

Here is the summary of my testing results from 2007 to 2009:
Total trades: 35
Total wins: 26 (74%)
Average win: 13%
Average loss: -8%
Win : Loss ratio = 1.5 to 1

These were very exciting results, if you win 74% of the time, and if your average win is 1.5 times your average loss, you certainly have a positive edge strategy. Now, because you place only one trade per month, this is a long-term strategy, and one must be able to stick to it and weather the ups and downs. Granted, the universe of the test is also limited due to limited time availability and the fact that this is one trade per month.

One could always improve these results by implementing some adjusting strategies. Because TOS's backtesting feature is limited, I was limited to exit at max loss for risk management. A more detailed backtesting system would allow to implement some intra-day testing rules to avoid taking losses when the position got in trouble.

That being said, I decided to implement this strategy on my portfolio. Hence the live Iron Condor for DEC.

Here is a log of my backtesting results: