I've said it for years, position sizing matters in a high probability system. Much more so than you would believe and today's show is the first in a new mini-series we are doing leading up to the launch of our new backtesting software. Inside we'll cover a case study using and iron condor backtest we ran on TLT including the impact on returns that altering the position size had on the portfolio.
Key Points From Today's Show:
Weekly Iron Condor in TLT
- Set the trade up to make weekly entries every 40 days, averaging 40 days to expiration.
- There may be some weeks that have no entries, and rarely any overlap between trades.
- Overall allocation in the first run was at 50%, which really impacts the profitability of the trade.
- There was no IV rank filter, and we just made as many trades as we could.
- Took profits at 50%, and there was no stop loss or adjustments.
- Selling the 20 delta calls on the short side, and the 20 delta puts on the short side, creating an expected 60% win rate.
- This iron condor lost compared to the S&P 500.
- It had a negative 67% return over the testing period.
- The number one reason why this trade lost was because of over allocation.
- Taking profits early, and IV's over expectation, we still won at 81%.
- The killer is the drawdown that was associated with high levels of allocation.
- The sequence of returns created an impossible situation to recover from.
*Much more important to have slow, steady gains in your portfolio as opposed to big swings and big movements in your account.
Tweaks and Adjustments:
- Reset the strategy and adjusted the overall allocation from 50% to 30%.
- Used the same exact setup - 40 days to expiration, no IV rank, taking profits at 50%, no stop loss, etc.
- Just entered fewer trades for the portfolio size -- instead of doing five tickers, do three.
- Went from a negative 67% return to a 6.86% return.
- The max drawdown was reduced to 45%, which happened in the middle of the cycle.
- This shows how important small tweaks in allocation can be, as well as the importance of not having large drawdowns early on in your portfolio.
- When your sequence of returns are not correct and you are over-allocated, so you lose early big, which sets you up for disaster.