Iron Condor gets tested
A user asked us: "under iron-condor if one side ITM before expiration that means I have to close the deal? thank you."
So you set up an Iron Condor, and now one of the sides is tested (in the Money). We run a study to compare the results of 2 scenarios:
We compared the strategy:
When you close the trade each time is tested - whether on the PUT or on the CALL side - your P/L will suffer. Some of these trades that exit early will recover and end up being profitable. The probability of getting tested is around twice the probability of ending in the money. Closing when tested did improve the Standard Deviation. It is a more conservative trading tactic.
We tested the same strategy, but this time we did a small adjustment. We closed the trade if it reached 50% of maximum profit.
As you can see the P/L improved. Also the average duration was reduced to 34 days.
Here is a side by side table:
Typically defined risk strategies do not benefit from closing early when tested. This study confirms this observation. Also, adjusting the mechanics by closing when 50% is reached did show improvements in the final results.
We backtest an options trading strategy to observe its real historical performance and discover a true winner using the eDeltaPro Options Backtesting Software.
The Basic Backtesting Workflow. How to setup and optimize a study based on empirical historical data. Step by step explanation with a real-life example.