Iron Condors vs. Strangles: P/L Analysis [STUDY]

[Music] what's up everybody Chris here from Project option comm and in today's video we're going to compare iron condors and strangles and we're going to look at a historical profit and loss analysis of the two strategies so let's get right into it so first and foremost short iron condors and strangles are very common strategies as they are both market neutral trades now that's generally speaking and that just means that both strategies profit when the stock price remains range-bound now however iron condors have less risk and less reward potentials compared to strangles so there are two questions that we want to answer how have the two strategies compared historically in regards to profits and losses and how have the trades performed when entered in high versus low VIX environments so by limiting your reward and your risk by creating an iron condor how does that compare to a short strangles performance historically speaking so in this particular video we're going to compare iron condors and strangles with 16 Delta short options and 30 delts of short options separately so 16 Delta means that the short options have an approximate 16% probability of expiring in-the-money and 30 delta short options means that those short options have an approximate 30 percent probability of expiring in-the-money so those 30 Delta options are going to be much closer to the current stock price while those 16 Delta's short options will be much further from the stock price so we'll use those two starting points and we will compare different iron Condor variations with each of those short option variations so let's get to the study here is the methodology we're going to use for our first test which is to test 16 Delta short option strangles and iron condors the underlying we're going to look at is the S&P 500 ETF which runs under the ticker symbol s py or spy the entry dates we're going to use are every single trading day from 2007 until present the target time the expiration we're going to use is 60 days and we're going to look at three different trades the first trade is a short 16 Delta strangle and that means we're going to sell a 16 Delta call option and sell a 16 Delta put option the second trade were going to look at is a short iron Condor with 16 Delta's short options and 5 Delta long options so we're going to sell a 16 delta call option and buy a 5 Delta call option and then we're going to sell a 16 Delta put option and then buy a 5 Delta put option the third iron Condor variation we're going to look at is we're going to sell a 16 delta short option and then buy 10 delta long options so that third trade variation is going to be a short iron Condor with 16 delta short options but those long options are going to be closer to the short options so it's going to be a less risky trade now all positions are held to expiration now the first thing we're going to look at is the cumulative profit and loss of every single occurrence over the time period so we're going to look at the expiration profit and loss summed for each trade approach over the entire time period now here is what we found so as we can see here the 16 Delta strangles clearly had the highest overall profit and loss of all three approaches at the same time the 16 Delta strangles also had a very violent drawdown in 2008 now when we look at the 16 Delta and 5 Delta iron condors in the 16 Delta and 10 Delta iron condors we can see that the iron condors with 5 delts and long options came in second place in terms of overall profitability with the first being the strangle now the 10 Delta iron Condor which means the long options were 10 does that approach had the least amount of variability in the overall profitability and the least amount of profitability overall so when we look at each of these approaches in terms of cumulative profits and losses becomes clear that the most risky approach is to sell strangles but that approach was also the most rewarding now on the complete other side of the spectrum we have the 16 delts a short option and 10 delta long option iron Condor which was the least risky of the three approaches but therefore had the least amount of profitability at the end of the period so this gives us a consistent finding of you know the less risk you take the less reward you're going to have now the running profit-and-loss only tells us part of the story so let's dive a little bit deeper and look at some of the metrics related to each approach so when we look at win rates so the percentage of profitable trades we can see that the 16 Delta strangles had the highest success rates compared to the iron Condor approaches with the lowest success rate occurring in the 16 Delta and 10 Delta iron Condor that's the 16 Delta short option and 10 Delta long option iron Condor so with the more risk that you take the higher premium that you collect you've historically had a higher win rate than limiting your risk and taking in less premium with the iron Condor approaches now at the same time the average profitability for each trade was lower for the iron Condor approaches and that's because you are buying options against the 16 Delta short options which reduces your maximum maximum profitability and that's going to limit your average profit and loss now the standard deviation of PL is of course the highest in the 16 delta strangles because there is no loss limit for those trades now in the iron Condor approaches the standard deviation of profits and losses which was much smaller because those trades have much more certain outcomes and they collect less premium so with less premium collected and lower potential losses the variability in the profits and losses of those trades is lower now when we look at the average losses we see the same exact thing so since the 16 delta strangles have no loss limit while the iron Condor approaches have limited risk we see that the average losses are the highest in the strangles and much lower in the iron Condor approaches with the lowest average losses occurring in the 16 Delta short option and 10 belt a long option iron Condor variation now again in the 10th percentile piano that's going to tell us the PL that 90% of trades exceeded so 90% of trades did not reach that PL level so as you can see here the 16 Delta strangle had by far the worst 10 percentile PL which tells us that that approach had most significant drawdowns now when we look at all of these metrics together we find a consistent pattern that suggests the more risk you take the more your losses could be but also at the end of the day the higher your average profitability has been historically now if you want a middle-of-the-road strategy then that's 16 Delta short option and 5 Delta long option iron Condor did not suffer too much of a wind rate hit had slightly less average profitability but also had less variability in the profitability and substantially lower draw downs now we're going to do the same exact test that we just did for the 16 Delta iron condors and strangles and we're going to do it for the 30 Delta iron condors and strangles so we're going to do the same set of analysis for iron condors and strangles with 30 Delta short options and then at the end we're going to compare all of the approaches when entered in hi verse low VIX environments so we're going to take all of the strategies that we've analyzed thus far and then we're going to split them into two buckets based on the VIX at entry and we're going to try to see if we can find any patterns related to the volatility at the time of entering that trait now just like we did for the 16 Delta's short option strategies we're going to look at the S&P 500 ETF on every single trading day from 2007 to present and we're going to look at a target time to expiration of 60 days now our first trade is going to be to sell a 30 Delta strangle now that means we're going to sell a 30 delta call and then sell a 30 Delta put then we're going to look at two different iron Condor variations the first is going to be to sell 30 Delta's short options in buy 10 Delta long options so we're going to sell a 30 delta call and buy a 10 delta call then we're going to sell any 30 delta put in buy a 10 delta put and the final variation of the iron Condor that we're going to look at is to sell 30 Delta's short options and by 16 Delta options so we're going to sell a 30 delta call by a 16 Delta call then sell a 30 Delta put and by a 16 Delta put now again all trades are held to expiration so let's start with the running profit and loss of each approach now in this graph we're looking at the profit and loss of each trade at expiration summed over the entire period so we have about 2,500 trades in each approach and we're summing each of those expiration profits and losses over time now consistent with what we found with the 16 Delta iron condors and strangles the 30 delta strangles outperform the iron Condor approaches in terms of overall profitability but also had the steepest drawdown in 2008 that's because strangles have no protection and they have unlimited loss potential whereas iron condors have limited loss potential so those iron Condor trades are much more predictable in terms of losses and therefore are less risky now just like before the iron condors with the long options that are closer to the short options had the least variability and overall profitability and the shallowest drawdowns and the least amount of profits over the time period so that would be the 30 Delta short option and 16 Delta long option in this particular case so again that 30 Delta's short option and 10 delta long option iron Condor was the middle-of-the-road strategy between just selling the strangle and then selling the iron Condor with 16 Delta long options so like we did before let's go ahead and take a look at the profitability metrics for each approach and then look at the profits and losses for all of the strategies we've analyzed based on the VIX at the time of entering the trade now when we look at wind rates similar to what we saw with the 16 delts of strangles and iron condors the 30 delta strangles had higher success rates than the iron Condor approaches and that's because when you purchase options against your short options you collect a smaller credit which means your breakeven points are closer to the stock price and that means you have a smaller range of profitability which leads to a lower rate of success now consistent with the 16 Delta iron condors and strangles the 30 dozen strangles had much higher average PNL per trade than the iron Condor approaches and that's because by purchasing options against the short options you reduce your maximum profitability because you bring in a smaller credit now at the same time the 30 Delta strangles had the highest standard deviation of profits and losses and that's because those 30 Delta options are actually pretty close to the current stock price and by selling a strangle you have unlimited loss potential so therefore you're going to have much more you're going to have a lot more variability in your profits and losses because one your overall credit received is higher but you also have much more lost potential now when we look at average losses we can see that the iron Condor approaches of course had lower average losses than the strangle approach and when we look at the 10th percentile P&L the differences between the short strangle and the iron Condor approaches is substantial so the 10th percentile PL for the 30 Delta strangle was a three thousand 386 dollar loss while the 10th percentile PL for the 30 Delta short option and 10 Delta long option iron Condor was a loss of 1085 dollars which means the draw downs for the iron Condor approaches were more than 70 percent less than the 30 Delta strangle approach now that we've looked at six different trade approaches with 30 Delta short option and 16 Delta short option starting points we need to answer another question how did all of these approaches perform when implied volatility was low or high at the time of entry now to answer this question we bucketed all of the occurrences into two equal buckets based on the VIX at entry now our threshold for high and low Ivy entries is 17 and 1/2 as that was the median VIX level over the period now let's start by analyzing the success rates for each strategy and the high versus low VIX entries so we're going to look at the percentage of profitable trades at expiration when the VIX was below seventeen and a half at the time of a trade entry and when the VIX was above seventeen and a half at the time of trade entry now let's start with the 16 Delta's short option approaches so the 16 Delta's short strangles actually had a higher percentage of profitable trades when sold when the VIX was below seventeen and a half as compared to when they were sold when the VIX was above seventeen and a half now we look at the iron condors the difference was slightly less notable but still present nonetheless now when we look at the 30 Delta's short option approaches we didn't see a difference in the percentage of profitable trades based on the VIX at entry now how did the average profitability per trade compare in each volatility environment now let's start with the 16 delta short option approaches now the green bars represent the high VIX entries and the yellow bars represent the low VIX entries very interestingly the 16 dose of strangles and the 16 delts of short option and 5 Delta long option iron Condor trades experienced higher average trade profitability when the VIX was below seventeen and a half now this is a very interesting finding because when the VIX is higher that's an indication that option prices are more expensive and you would think it would be more advantageous to sell options when they're more expensive however based on these findings we see lower average profitability for the more risky trade approaches that were entered when the VIX was high before diving in and trying to figure out why this is let's go ahead and look at the 30 Delta short option approaches and see if we find the same pattern interestingly we see the same exact pattern with a 30 Delta short strangles but in this case the iron condors actually saw higher average profitability in the higher VIX entries while the more risky approach of just selling the 30 Delta strangle had lower average profitability in the high VIX entries now let's go ahead and look at the drawdown metrics for all of these approaches in the high end low VIX entries to see if we can figure out why that more risky trades are underperforming in the higher VIX entries now when we look at the 10th percentile profit and loss for all of these approaches in the high end low VIX entries we can see that the 16 Delta strangles and the 16 Delta iron condors with 5 delts of long options so the wider iron Condor variation we can see that those trades had the worst drawdowns in the high VIX entries as compared to the low VIX entries now that tighter iron Condor variation with 10 Delta long options didn't really have any noticeable difference between the high and low VIX entries so this is interesting because this tells us that the underperformance in the more risky trades in the high VIX environments actually stems from larger draw downs so let's see if the same pattern exists with the 30 Delta's short option approaches consistent with the 16 Delta short option approaches the 30 dose of strangles had by far the worst drawdowns in the high VIX entries as compared to the lower VIX entries now with the 30 Delta short option variations the iron condors did not see much of a difference between the high VIX and low VIX entries however the short strangle approach saw a substantial difference now all of these findings tell us that when the VIX is high there's a lot of risk in selling uncovered option positions in the form of short strangles so to mitigate some of that risk you might want to sell an iron Condor instead so you basically create an iron Condor by taking that short strangle and purchasing calls and puts that against those short options so if you sell a 16 delta call and the 16 delta put if you're selling that in the high VIX environment you might want to go ahead and limit the risk of the trade by purchasing a 5 Delta call and a 5 Delta put against those short options and the same is true if you're selling 30 Delta's short options so even though in high VIX environments the option prices are pumped up and inflated they're usually that way because the market is much more volatile and when the market is more volatile you do have the potential to incur serious draw downs as a naked option seller now let's go ahead and summarize all of the key points from this video so as we'd expect the average profitability of iron condors has historically been lower than short strangles as iron condors have less risk and less reward potential now when filtering trades for high versus low VIX entries we saw substantial improvements in the 16 and 30 delta short strangles that were sold in the lower VIX environments now the iron Condor approaches did not have a substantial difference between the low and high VIX entries the findings suggest that while high VIX means expensive option prices substantial losses have historically occurred when selling uncovered options in high VIX environments and that's because when the VIX is high market volatility is also usually high now in the same vein traders should be care when selling naked options in low VIX environments as their transition to high VIX environments with large realized market movements can lead to significant draw downs so when you sell naked options or when you sell options in general in lower implied volatility environments your short strikes are going to be much closer to the current stock price which means if things change quickly and that stock starts to get a lot more volatile then your short options are going to be much closer to that stock price and therefore will have a higher probability of getting violated in a large way so what you can do to just mitigate all this risk is you could avoid selling a strangle altogether and instead opt for an iron condor thank you so much for watching this video everybody I hope you learned something and I hope you found it informative if you did please take a moment to subscribe to our youtube channel by clicking on that circle emblem on the left hand side and if you want to check out some more of our videos go ahead and click on the video link on the right hand side [Music]

Channel: projectfinance

Views: 52,229

Rating: 4.9195099 out of 5

Keywords: iron condors vs strangles, iron condor vs strangle, strangle vs iron condor, iron condor management results, short iron condor, strangles, iron condor management, selling strangles, iron condors, selling premium, short strangles, iron condor strategy, short strangle management, projectoption, short premium, iron condor, stock market, trading, options, monthly income, trading options, options trading, selling iron condors, s&p 500, selling options, short strangle

Id: g7KzTnMtBcg

Length: 19min 59sec (1199 seconds)

Published: Tue May 02 2017