ROI Note Iron Condor Oct 2017

The October cycle is complete and we booked a realized loss of 22.4% for the autotrade accounts. We will always give something back to the market, which is just part of trading, and we’ll historically give some of our gains back 4 to 5 months out of the year with this specific strategy. However, this loss was larger then usual.

When we have a losing month, which is historically 4 to 5 months each year, we can usually keep the monthly losses under 5%. However, the UP trend triggered by renewed & expanding corporate earnings, synchronized global growth, and highly anticipated tax reform caused a relentless and rapid UP trend in the S&P500 index that was difficult to keep up with as we were adjusting our trades upward. Fortunately, we were sitting on a large YTD cumulative gain of 78.1%, which includes commissions, at the end of September, so this loss takes us down to a realized gain of 38.1% as of November 1.

Ever since the Trump win in November 2016 stocks have trended higher in anticipation of a reduction in regulation, faster GDP growth, and an incremental $8 of S&P500 earnings that would be created by a corporate tax cut. When the market trends strongly, either UP or DOWN, this is not optimum for credit spreads and we switch gears into adjustment mode with the primary objective of moving our trades in the direction of the trend and holding the cash balance in the accounts relatively flat.

As a general guideline, the retooled IC1 strategy makes a positive return of 7% to 10% per month for 7 to 8 months of the year as the market trades range-bound. For 4 to 5 months of the year the market will historically trend upward or downward and we’ll switch into adjustment mode usually realizing 2% to 5% losses per month, which allows us to hold the cash balance in the accounts mostly flat. When you add up the returns over a full 12 months, we can historically make some handsome returns. Therefore, going through adjustments 4 to 5 months out of the year is just part of being in the business of writing credit spreads.

Getting through the adjustment periods and holding the cash balance in the accounts relatively flat is not easy to do and takes a lot of experience. We believe our team is the best in the business in navigating through strongly trending markets as we’ve been focused on credit spreads and iron condors for 14 years.