0 DTE Iron Condors (Part 1)

I recently viewed a webinar on 0 DTE credit spreads and iron condors (IC) that I found quite enticing. Today I will present my backtesting approach to studying this strategy.

Why did the presentation pique my interest?

• 75-85% winners
• Available discretion with regard to stop-loss and exit (mechanical or mental)
• Tradeable mechanically from the [near] open or using discretion to determine market direction before selecting side(s)
• Subscription software available for $250/month providing built-in indicators capable of improving success rate to 90-95%

Promises of your run-of-the-mill Holy Grail, pretty much: gently disguised, perhaps.

I conducted the backtest in OptionNet Explorer (ONE) as follows:

• At 9:40 AM, open one contract IC in front expiration (monthly expiration on Th with 1 DTE else Weeklys 0-1 DTE).
• Sell short put at 5-10 delta to receive at least $0.75 – $0.90 (opt for closer to 10 delta on Tu/Th).
• Sell short call at 5-10 delta to receive at least $0.60 (opt for closer to 10 delta on Tu/Th).
• Buy long put and long call at the NTM strike available for $0.05 or 50 points away from short strike (use NTM strike when multiple options are displayed with identical premium).
• For opening trade, assess transaction fee of $11 for premium approaching/exceeding $1.00 or $6 otherwise.
• If intraday distribution of PnL (graphically displayed in ONE!) mostly in the center then allow to expire worthless unless check of intraday high or low (pne click each in ONE) reveals breach of max loss threshold.
• Max loss for a vertical spread is 2x initial credit received for the short option: short option premium * 3.
• At the earliest 5-minute increment when premium exceeds net loss, close the distressed vertical spread leaving long option only if priced at $0.05 or less.
• For closing trades, assess transaction fee as follows: $21 for losers priced over $5.00 in a fast-moving market, $11 when priced between $0.80 – $5.00, or $6 otherwise.
• Any remaining options DOTM at 3:55 PM may be allowed to expire worthless by closing for zero cost.*
• BTC any remaining options at 3:55 PM per transaction fee guidelines described.

I try to follow presented guidelines presented, but some details are left vague. 5-10 delta is vague (the presentation mentioned “under 5 delta” or “under 10 delta”). Defining transaction cost to account for slippage is vague (but present, which I don’t believe was the case in the presentation. See second paragraph here). 0-1 DTE is vague compared to only 0 DTE. If the trade is robust and not just good marketing, then these specifics should not matter over a large sample size of trades.

The biggest deviation from presented guidelines is inclusion of Tu/Th trades. The presentation focused on 0 DTE. 100% decay is only possible for these. The Tu/Th trades decay up to ~50-70% even when DOTM with 1 DTE. I therefore tried to get a bit more premium by opening these trades closer to 10 delta. The risk to selling NTM is a lower winning percentage, but shouldn’t that be offset by the additional DTE to keep shorts farther OTM? All trades lasted exactly one day, which in theory should normalize magnitude of market movement. Whether a better control exists may be an empirical question, but always remember past performance is no guarantee of future results.

I will continue next time.

* — An Expire Options button to do so with two clicks (including confirmation) would be a nice software addition.