12 years of Iron Condor

Iron condor is a risk defined option strategy with a high probability of winning. The data says that it profits ~81% of times. I did some detailed analysis on how this strategy has performed over a 12 year period from 2008 – 2020. This period includes 2 major market crashes of 2008 and 2020, thus a wide variety of volatile markets are covered in this analysis.

In my earlier blog, I did a similar analysis on selling Strangle. I showed that due to unlimited risk in Strangle, one bad month could wipe out years of gains. Iron condor is a modified version of Strangle but with defined risk. Thus the trader knows upfront about how much risk they are taking. Starting with basics of Iron condor, I aim to explain how it has performed in the past 12 years in different market volatility. I will give a comparison of Iron condor with Strangle and will show the power of defined risk vs unlimited risk in trading.

Let say Nifty is trading at 9250. We could set up an Iron condor by selling 1 lot of OTM 9700CE, selling 1 lot of OTM  8800PE, buying 1 lot of OTM 10200CE and buying 1 lot of OTM 8300PE.

This is a net credit strategy. The options bought on each side limits the risk. So let say the initial premium collected is say Rs.175 . The trader will keep the entire Rs. 175 , if Nifty expires above 8800 and below 9700. The break even points of this strategy are 8625 (8800 – 175) and 9875 (9700 + 175). Thus even if Nifty expires above 8625 and below 9875, the trader will not lose anything. Beyond this range, the trader will start losing. The maximum upside & downside loss is Rs. 325 . Upside loss : 10200 – 9700 – 175 . Downside loss : 8800 – 8300 – 175 . So even if nifty rallies 2000 points or falls 2000 points, the trader would not lose more than Rs. 325 , which translates to ~Rs 24k per lot. Below is how the payoff looks for Iron condor.

Payoff for Iron Condor

Iron condor setup for analysis

I have used the following setup to analyse Iron condor:

  • Nifty is used as the underlying.
  • I sold 1 lot on the call side & 1 lot on the put side. I bought 1 lot on the call side and 1 lot on the put side for hedging. 1 lot is assumed to have 75 units throughout the period.
  • Options with monthly expiry are chosen to set up the iron condor.
  • Iron condor is entered 27 days before the expiry.
  • Iron condor is taken till the expiry. So no stop loss or profit booking before expiry.
  • To set up the credit leg, I have sold OTM options 5% strike away from the spot price on both Call & Put side. For example, if Nifty is at 10000, 5% of 10000 is 500, Iron condor is formed by selling 9500PE & 10500CE
  • To set up the debit leg, I have bought OTM options 10% strike away from the spot price on both Call & Put side. For example, if Nifty is at 10000, 10% of 10000 is 1000, Iron condor is formed by buying 9000PE & 11000CE
  • Analysis is done for monthly expiries lying in between 1 Jan 2008 and 8 April 2020

12 years PnL diagram

12 years PnL for Iron Condor

Please zoom-in to the picture if it is not visible properly.

Key points to note:

  • X -axis represent the year from 2008 to 2020
  • Y-axis is the Pnl from 0 to 1,40,000
  • Iron condor gave a net profit of ~1L in the past 12 years. Since the margin required to sell 2 lots of Nifty is ~1.5L, that is ~70% return in 12 years (not compounded). Note, one can get ~6% per annum extra return, if they use liquid bees as collateral for margin money.
  • NSE is reducing the margin requirement for such strategies, so going forward we can have higher ROI. 
  • For simplicity, while calculating ROI I have not taken drawdown into account. Adjust the ROI as per your bet sizing.
  • Though this strategy has a high probability of winning, the risk reward is low. From 2011 to 2019, the strategy has given returns with smaller drawdowns. In 2020, due to the crash, ~1.5 years of returns got wiped out. Though the risk was limited, the risk reward ratio was not favorable. It took ~1.5 years to gain what got lost in March 2020.

Comparison with Strangle

PnL comparison between Iron Condor & Strangle

Please zoom-in to the picture if it is not visible properly.

Key points to note:

  • Red lines represents PnL for Strangle
  • Green line represents PnL for Iron condor
  • X -axis represent ~140 trades taken from 2008 to 2020
  • Y-axis is the Pnl from 0 to 2,00,000
  • Strangle was giving higher returns till 2019. Due to the crash in 2020, returns of Iron condor exceeded that of Strangle. This shows that in the short term, unlimited risk strategy may show better returns, but when a trader taks large number of such trades, the returns eventually get eroded due to a few bad days.
  • Due to being risk defined, iron condor lost much lesser in times of market crash. [See trades form 0-20 and trades above 140]. Thus, Iron condor is better resilient to market volatility as compared to Strangle.

Returns analysis

Net returns: 102101.25

Total trades taken: 143

Number of profits: 116

Number of loss: 27

Max drawdown loss: -39176.25

Top 5 profits: [11812.5, 9832.5, 8625, 8598.75, 7818.75]

Top 5 losses: [-39176.25, -16233.75, -15903.75, -13147.5, -12945]

Average return per trade: 713.9947552447552

Sharpe ratio: 2.008839488522548

Key things to note:

  • 116 wins out of 143 trades taken. That translates to ~81% win rate. 
  • If you see top 5 profits and top 5 losses, ~11.8k is the max profit. But the max loss is ~39k .The win rate is very high, but reward to risk is less than 1. 
  • Sharpe ratio is the measure of how good the strategy is. Any strategy with Sharpe ratio greater than 2 is considered good. Monthly iron condor selling OTM options 5% strike away from the spot and buying OTM options 10% strike away from the spot has a sharpe ratio of ~2 , which is considered good. 

Volatility analysis

I have done analysis of returns in different market volatility. Volatility is tracked using INDIA VIX index. This analysis will help us understand that in what market conditions has Iron condor performed good and in what conditions we should completely avoid it.

Below table analyses the returns in different VIX buckets. VIX bucket tells what was the INDIA VIX at the time of entry of the Iron condor. For example, a VIX bucket of [10, 14] tells that when Iron condor was entered, the VIX was in range [10, 14]

VIX based analysis for Iron Condor

Key things to note:

  • Iron condor has given net positive PnL per trade in almost all volatility conditions.
  • The data above volatility 30 is not sufficient to say anything with high confidence. So take that data with your personal subjective judgement.

Conclusion

Iron condor has proven to have a high win rate with defined risk. With NSE introducing lesser margin requirements for risk defined strategies, the ROI can become more lucrative. Data also proves that playing ion condor is much better than selling naked strangles.

Learn more about the risks of naked option selling here.

See similar analysis on selling strangles here.

If you wish such analysis for more option strategies, please let me know in the comments section. Please subscribe to my blog and follow me on twitter to get all the latest updates.

23 thoughts on “12 years of Iron Condor”

  1. Great Work Sandesh.
    I am looking forward to seeing a similar analysis for Short straddle with 45DTE & 40 DTE. How did you extract the option strike price?
    For now, it is time-consuming to check the price for every expiry?
    Do you have another way of doing this?

      1. Thank you. Is this paid service to get the data?
        I would like to backtest some of my strategies for old data.
        Is it via web scraping? Is it also possible to get live data from NSE using this Phython? Do you have any recommendations here?

        Please share your insights here.

        thank you

  2. Hi, currently I am using a straddle short strategy where I take straddle at peaks of intraday SD. I keep adjusting the losing leg at 10% loss and reentry at the atm leg. At any given point of time I have a balanced position. I get a return of about 5%+ every week (only bnf weekly options). What would you call such a strategy? Can it be back tested? Can it be improved upon?

  3. Hi Sandesh thanks for your effort! Just came across your blog and loving it. Had a couple of queries
    1. Have you assumed any transaction costs since the average gain might be meaningfully impacted with brokerage
    2. Is it possible to backtest with a Stop loss rule like exiting position if the value hits 2x of credit received and profit taking rules as well like 50% or 75% of credit received. Yiu might find this blog interesting for more testing ideas http://dtr-trading.blogspot.com/?m=1

    Kudos again for your effort and thanks for sharing with us.

    Regards, Vivek

    1. Thanks Vivek
      1. Transaction costs are not included. You are right, that will affect the PnL. Please add txn costs as per your broker. The blog is indication of how strategy performs in general.
      2. Sure, I will try to back test your configuration.

  4. Great work Sandesh! Can you explain on “one can get ~6% per annum extra return, if they use liquid bees as collateral for margin money”? Isn’t there a haircut?

    1. Haircut does not affect returns of liquidbees. it only reduces the collateral available for trading.

  5. Hi Sandesh, Could you please check Iron condor strategy on bank nifty day before and on expiry dates? Thank you for sharing your analysis results.

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