Despite my enthusiasm in my last post for using /NQ futures to overcome any loss in an NDX iron condor going wrong, I am reconsidering the routine use of such futures.
The trade I made on Thursday worked, making this test session 1 and 1: 50%. But the futures graph was very different on this past Thursday and Friday:
I put on this trade late Thursday a.m.:
- Sold the 6270 Call
- Bought the 6280 Call
- Sold the 6170 Put
- Bought the 6180 Put
... for a $1.90 credit. This gives $1.90 / ($10 - $1.90) = a 23.456% return.
After you put on this trade, the only chart you need to look at is the NDX settlement number, which goes under a different symbol called NDS:
... and as you can see by the NDS value from Friday, this trade worked and all 4 legs expired worthless, for a full profit.
If we can really do this 91.7% of the time (make 23%), and we risk 25% of our stake every time, the 1-year (52 week) Monte Carlo results are like this:
- Starting stake $55,000
- Mean value $281,043
- Standard deviation: $181,147
So the ending results should be between $100K and $462K 68% of the time ...
(I think I can improve this trade by widening it a bit ... for example sell the 6280 calls and buy the 6290 calls ... so what if this returns "only" 18% or 20% if you win 93.5% of the time ...)
For this test I'll keep doing the "one standard deviation" but will check results against the "one standard deviation and one more strike wide" version. Last week it would have made no difference whatsoever ...
The risk you have to be willing to stomach doing this trade this way is: now and then you will lose 25% of your account. You'll make enough to cover this, many times over. But if you can't stand this you'll have to cut down the amount you risk, which will reduce your expected return.
The Kelly Criterion is even wilder: it suggests risking 57% of your stake on this trade. Great when it works, but hoo boy! I'd suggest being damned sure of the 91.7% win rate before doing this ...
