We were curious to see if managing losers would be valuable in defined-risk strategies such as iron condors. In typical tastylive fashion, we wrote a study to test the question.
Our study was conducted in the SPY (S&P 500 ETF) using data from January 2005 to the present. Using the option expiration cycle closest to 45 days to expiration (DTE) we sold a Wide Iron Condor (selling 16 delta Strangle and buying 5 delta wings). We opened a new position only after closing the old one. We allocated 25% of the available capital to selling these Wide Iron Condors and determined if the average performance could be increased by managing losers at levels between 1 and 5 times the total credit received.
A graph of the results showed that managing losers underperformed a holding to expiration strategy. A table displayed the total number of losing trades at 1x, 2x, 3x, 4x, and 5x the credit received and more importantly, the number of losers that occurred earlier than 21 DTE at each level. The number of losing trades, at these multiples of the credit received, that were losers before 21 DTE, was extremely low or zero.
Another table displayed the average P/L increase per contract obtained by closing the trade 21 DTE before expiration. The superiority of closing the trade before 21 DTE was displayed in a graph of running P/L. It obviously outperformed managing losers.
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