2016 was a good year for the Iron Condor strategy (IC) where we finished the year with a 26.3% gain. However, it started off rocky as we were still in the process of refining & re-tooling the IC1 strategy.
The IC1 strategy did well for about 8 years, but it then started to struggle as the Federal Reserve continued their Quantitative Easing (QE) program that printed trillions of US dollars to buy US bonds and mortgage backed securities. The QE program flooded liquidity into the US financial system, which caused an artificial upward bias in the stock market. This upward bias negatively impacted most non-directional “selling” strategies, including the IC strategy.
Because the market changed and the IC strategy was struggling, we decided in late 2014 to re-tool the strategy to better adapt to the new market conditions. When refining a trading strategy it usually takes 18 months, and by mid-2016 we completed the refinement process. By mid-2016 we were confident that the refined IC strategy could now handle the new dynamics of the stock market; that is, it could better navigate the extreme monetary policy influences from the US Federal Reserve, the European Union and the Bank of Japan.
The newly refined IC strategy now focuses on 2 week in duration credit spreads and iron condors that use week1, week2, week4 and week5 options. We now avoid the traditional monthly/week3 options as these have become too risky during the settlement process. In the past we primarily used monthly options, but as the market changed, the monthly, European style settlement process started to become too volatile.
The advantages of the new IC strategy are the following: 1) We now open and/or close trades two to four times each week making it faster moving and more nimble; 2) We can adjust trades that go against us more decisively and quickly; 3) One or two spreads expire every Friday, so there is a continuous stream of trades expiring each Friday with a profit – i.e. for the profitable trades. Overall, we are very pleased with the new IC strategy.
Regarding where the stock market is today, as of Dec 30, 2016, the major indexes rallied strongly after the presidential election in anticipation of Trump’s pro-growth initiatives. The indexes are overbought and will most likely pull back in early January 2017 as many investors will want to book some profits, locking in gains possibly at a lower tax rate. Because S&P500 earnings are now growing after 5 quarters of negative growth, the S&P500 index (SPX) will most likely find support near the recent breakout level of 2200 and then trade in a sideways channel between 2200 and 2300 through April of 2017. If this plays out as we expect, the IC options selling strategy should do very well.
Overall, 2016 was a good year where we posted a 26.3% gain and feel that we are well prepared for what awaits us in 2017 with the newly optimized IC strategy.