Our Iron Condor lost money, and we don't care

VTS Community,

Do I care that our QQQ Iron Condor got stopped out for a loss today?  Not really...  Our total portfolio profit has dwarfed the loss in the same time period.  I don't want to sound cold so let me explain my point  :)

A lesson on true diversification

One question I get quite a bit is why we size our Iron Condors with what seems to be a fairly small allocation.  Now the strategy itself has a 20% allocation within the Total Portfolio Solution so it's 1/5th of our capital.

However, each individual Iron Condor trade only allocates 3% of total capital 

Now of course the best explanation of why we allocate 3% per trade will be the Lesson 8 video of the 30 video Iron Condor Strategy Mega Course available for all VTS members

* Claim your FREE Trial to VTS here to gain immediate access to the full course:

Since we're facing a losing trade right now I thought we would run some interesting numbers to show you why our 3% Iron Condors are actually ideal compared to the rest of the portfolio.

The great and powerful "market neutral" Iron Condor

The main goal of the Iron Condor Strategy is to have the opportunity to make a profit when the market is not moving strongly in either direction.  This is an area of weakness within most investor portfolios.  They have plenty of net long market exposure, but what they don't have is a way to make a profit when the market does not just keep storming higher. 

Iron Condors are Delta neutral, which means if the market stays relatively rangebound and the rest of a portfolio isn't doing much, they do very well.

-  We want the ability to profit when markets don't move as much

-  We DO NOT want to get crushed when the market trends strongly up

-  We want to stop out quickly when the market crashes

This is a balancing act that makes allocation size very important.  We know the strategy itself is a great performer on its own long-term.  Here's the most up to date performance:

Our current QQQ Iron Condor is a great example we can highlight today.  Clearly the market has been quite strong the last few days and has caused a problem for our trade.

We opened the QQQ Iron Condor on July 11th, and here we are one week later and it's already stopped out for a loss.  This is a pretty clear example of an Iron Condor that got smothered by a strong uptrend in the market.

So how much did this Iron Condor lose for us?  Example for a 100,000 total account value:

-  Each Iron Condor use 3% of net liquidation value

100,000  *  3%  =  3,000 allocation for the trade

-  To get the number of contracts we then divide that by the maximum loss, which for that QQQ trade was about 390$ per contract

3,000  /  390  =  7.69  (always round down, that's 7 contracts)

I'm writing this before markets open so here is the trade as of market close yesterday:

I opened the trade for a credit of 1.10.  We always use a 50% stop-gain and 50% stop-loss for every trade based on that premium collected.

Stop-loss  =  1.10  *  1.5  =  1.65

Since the QQQ Iron Condor is currently trading at 1.75, it has breached the stop-loss and needs to be closed.

1.10  -  1.75  =  -0.65

-0.65  *  (7 contracts  *  100)  =  -455$  

So this recent Iron Condor lost about 455$ in total.  In relation to the entire 100,000$ portfolio that is a loss of 0.45% for this Iron Condor trade.  Not a lot of course, but not nothing either.

Total Portfolio Solution profit in that time period:

* Remember, we have 5 strategies in the Total Portfolio Solution

Defensive Rotation is in QLD

Tactical Volatility is in Cash

Strategic Tail risk is in SSO

Volatility Trend is in 1x VXX Butterfly 

Iron Condors lost -455$

1)  QLD position in Defensive Rotation:  2,140$

Price at the time of my email on July 11th:  63.20

Price at market close on July 18th:  69.96

Defensive Rotation profit:  10.70%

-  The strategy has a 20% portfolio allocation

20,000  *  10.70%  =  2,140$

2)  CASH position in Tactical Volatility:  0$

3)  SSO position in Strategic Tail Risk:  1,162$

Price at the time of my email on July 11th:  57.50

Price at market close on July 18th:  60.84

Defensive Rotation profit:  5.81%

-  The strategy has a 20% portfolio allocation

20,000  *  5.81%  =  1,162$

4)  VXX Butterfly in Volatility Trend:  288$

-  We use 1% of net liquidation value per trade

100,000  *  1%  =  1,000 allocation for the trade

-  Open debit was 0.62 meaning the multiplier is 162

1,000  /  162  =  6.17  (always round down, that's 6 contracts)

-  Current premium is trading around 1.10

0.48  *  (6  *  100)  =  288$

5)  QQQ position in Iron Condors:  -455$

Total Portfolio Solution profit:

2,140  +  0  +  1,162  +  288  -  455  =  3,135$

That is what proper diversification is for

I went through those numbers to show that despite having an Iron Condor stop-loss out which is never fun, and especially since it only took 1 week, it's really not a huge deal because our total portfolio of all five strategies still made a +3% total return for the week.

Having the ideal allocation size for each Iron Condor trade is the reason.  Remember we want steady slow progress in that strategy which it has done for over 11 years now.  There's no doubt it's the most consistent strategy we have with the lowest maximum drawdown and average drawdown.  It also shows no correlation to the stock market, which is why it's a great diversification tool for us.

Trading is trading, and we opened an Iron Condor last week that very quickly stopped out this week.  Ouch!  Importantly though, it didn't in any way drown out the rest of the portfolio.

3% allocation per trade, with 3 potential trade positions to be opened at the same time on various asset classes.  Slow steady progress that fits in very well with the rest of the portfolio