Is Iron Condor a Profitable Option Trading Strategy?

  • Jun-25-2020

There are many option trading strategies with defined risk, one such option selling strategy with proper hedge is Iron Condor.

What is an Iron Condor strategy?

Iron Condor is a non-directional option strategy, but with risk controlled as we hedge the position by buying options.

Here’s an example, consider Bank Nifty trading at 20000 levels currently, to create Iron Condor Strategy, the following trades needs to be executed.

  1. Short 19800 Put option
  2. Buy 19700 Put option
  3. Short 20200 Call option 
  4. Buy 20300 Call option

All in same expiry dates, basically we short OTM options and buy the next strike levels of those OTM options to hedge it. We shorted 19800 Put option, so if bank nifty moves down and falls even further to 19700, 19500, 19400, then we end up in high loss , right? So in order to protect ourselves from such losses, we buy 19700 put option, which is next leg of 19800 put to hedge the risk.

This is how Iron Condor strategy is created, lets backtest with stockmock platform and find it out whether its really a profitable strategy, the below example is for Bank Nifty

We enter at the start of the expiry and close it on the expiry day, tested from 2017 to 2020

Here’s how the results look like, with more than 3 years of data, the over all profit is just Rs.4538 with transaction cost , this will give negative results.

So I tried changing the parameter, by entering just two days before expiry and exiting on the expiry day.

This has given better results than the previous one, however over all profits is still lesser, its 27600 Rs. profits for 3.5 years period, which is very minimal. 

Instead of hedging our positions with option buy, what would be the results, if we dont hedge at all? If we simply short OTM options, without hedge/stop loss, does it generate positive returns? We have tested that as well.

Short Strangle:

If we remove the buy positions in Iron condor strategy, it becomes Short Strangle. In this example, we shorting OTM options of bank nifty of both put and call. 

With same parameters, by entering just two days before expiry and exiting on the expiry day.. Tested from 2017 to 2020

The returns are much higher without using any hedge/stop loss, it has given more than 33 times higher profits with more than 68% winning accuracy. 

Conclusion:

Even though Iron Condor controls the risk , it drastically reduces the over all profits, in fact it ends up in loss after all cost. Whereas a simple short strangle strategy without any hedge has given outstanding results than the hedged strategy — Iron Condor.

If you liked this article, please do share share it (Whatsapp, Twitter) with other Traders/Investors. 


  • profile
    Arul Kumar Alrasu
      2 weeks ago

    After new margin system from June 2020, 4 to 5 lots Iron condor can be implemented for 1 lot of short Strangles. The margin required for naked option/future positions has been increased and for hedged positions it has been reduced drastically. So in my openion we should forget short Strangles strategy going forward. If you compare the return of investment for the new margin system then you will come to know.

    Reply 0 comments
  • profile
    s sudhir
      2 weeks ago

    With the new margins, IC gives better returns than strangles, no?

    Reply 0 comments
  • profile
    K V Rao
      2 weeks ago

    Long IC gives better returns for Bank Nifty

    Reply 0 comments
  • profile
    Ronit jain
      2 weeks ago

    Can we test calendar spread from this tool, as it requires option of next expiry as well, it would be great if we would backtest it. Thanks

    Reply 0 comments
  • profile
    tharik azees
      2 weeks ago

    I have backtested weekly expiry short strangle intraday , where one needs to enter at 2pm and exit at 3.30 pm. Just more than an hour of timeframe. It gave very high returns with a very small drawdown of less than 10000

    Reply 6 comments
    • profile
      Square Off
        2 weeks ago

      very good, great results.

    • profile
      tharik azees
        2 weeks ago

      Everyday. Expiry day will not give much as the premiums are very low

    • profile
        2 weeks ago

      trading everyday or on expiry days only ?

    • profile
      tharik azees
        2 weeks ago

      Entry is by 200 point OTM on both sides. Yes there is a big risk since the positions are not hedged. But we are trading only for an hour. Even if something goes terribly wrong, at the maximum we may see a 10 percentage move in index as they have circuit triggers. So maximum one can lose is 2000*20 = 40000 Rs. Its one in one million probability. Especially just in one hour of the day

    • profile
        2 weeks ago

      It reduced return if you put SL like 25% of sum of both premium. And without SL, its risky

    • profile
        2 weeks ago

      Can you share details... Like Entry criteria (ATM wise or premium wise); Stop Loss & Target (If any)?

  • profile
    Sai Mohan Reddy
      2 weeks ago

    But without hedge, on big gap days, it will take away all those profits. We are not keeping any stoplosses as well.

    Reply 0 comments
  • profile
    NAGA MITHUN REDDY
      2 weeks ago

    Hi, Instead of waiting till expiry can you test this strategy at various exiting options like (50%profit,100%loss) or(75%profit or 100%loss) ? I hope some exiting option will give decent returns.

    Reply 0 comments
  • profile
    Vivek Jain
      2 weeks ago

    Is this test on Weekly or Monthly expiries?

    Reply 1 comments
    • profile
      Square Off
        2 weeks ago

      tested with weekly expires

  • profile
    Harshit Patel
      2 weeks ago

    Hi, The Strangle purchased is too near, there is ofcourse no room to make money, the Strangle purchased should be atleast 2 Strike apart !!! That would have given better results !!

    Reply 1 comments
    • profile
      Square Off
        2 weeks ago

      We have tested with other far strikes as well, it has given lesser returns than what it is given now.


  • Tags | Iron Condor,iron Condor bank nifty,iron condor option strategy,iron condor vs short strangle,iron condor strategy,option selling strategy