I have experimented with many options trading strategies. But here is the one strategy that has outperformed all others so far – and that also fits very well with my risk profile and trading style.
Options trading has been a hobby of mine for the last couple of years. For nine months I have traded the 0DTE Breakeven Iron Condor strategy. So far it has proven to be consistently profitable.
These are my key statistics:
- 588 trades from April to December 2021
- Using an average buying power of 12.000 – 15.000 USD, I have made 9000 USD trading this strategy after commissions and fees.
- 41 % of the trades have been winners so far, 59 % have been losers
- All nine months have been profitable
This article is only to describe my own experience with this strategy, and should not be interpreted as financial advice in any way. Remember: Any options strategy carries great risk – and this particular strategy has the potential to blow out your account if you do not use stop losses or manage the risk well.
The 0DTE Breakeven Iron Condor strategy
So what is the 0DTE Breakeven Iron Condor strategy?
- It is a daytrading strategy on SPX – the index option for the S&P 500 index. 0DTE = Zero Days to Experiration.
- It consists of selling Iron Condors on SPX – with expiration the same day – collecting approximately the same premium on both sides
- The trades have a very tight stoploss – set separately for each side equal to the total premium collected for the Iron Condor. This limits the potential loss on each trade.
- Credit: I was first alerted to this day trading approach by Al Dabby in the very useful and friendly Facebook group Tastytrade Options. (I really recommend this Facebook group if you are interested in options selling)
Iron Condor: An options trading strategy where you sell both a call credit spread and a put credit spread at the same time. The trade profits if the underlying stays within a defined range when the options expire.
Characteristics of the 0DTE Breakeven Iron Condor strategy
There are two crucial characteristics of this strategy:
- It is a daytrading strategy – only executed on options that expire the same day. I trade only on days when the weekly options of SPX expire – which is Monday, Wednesday, and Friday.
- The very tight stoploss – hence the name “Breakeven” – means that the potentially loss on each trade in principle is close to zero. In practical terms the average loss should be normal slippage, which would typically be in the 20-50 dollars for one credit spread on SPX.
Many traders focus on their win rate. This is a strategy with more losers (59 %) than winners (41 %). Yet, the overall strategy is profitable. The main reason is that the average profit is much larger than the average loss.
So far the average win for me has been about 2,45 times the average loss. And that gives what is much more important than a high win rate, namely a positive expectancy.
Expectancy: Calculated as the percentage of winners multiplied by the average win size minus the percentage of losers multiplied by the average loss size.
This fits my personal trading style and risk profile. Yes, I will definitely have losing days. But the sizes of the losses are usually limited, and I have only had a few days with what I would call big losses.
There is also another reason this strategy fits my own personal trading style: It is market neutral. Many like to predict where the market will be moving. Personally, I have concluded that there is no chance I will be better than others in predicting this. I have no edge in knowing where SPX will go – at least not yet. Therefore I stick to strategies that are market neutral – and that make money on the passage of time, the so-called theta.
Theta: An option decreases in value as time passes. This is beneficial for the seller of an option (selling high, buying back cheap) – and to the disadvantage to the buyer. The Greek letter Theta is used to tell how much the value of an option decreases with passage of time. The strategy described in this article benefits from theta decay.
My results so far
On most trading days I use up to 12.000 USD of buying power on the 0DTE Breakeven Iron Condor strategy. On some rare occasions, I may risk up to 15.000 USD.
Buying power: The capital in your account the broker blocks for you to do the trades. Often called margin. Usually it is identical to the maximum theoretical loss on your positions.
During these nine months, I made 9052 dollars on this strategy. Compared to an average utilized buying power of 15.000 USD over nine months, that is by any standard a very nice return on capital.
Here is a monthly breakdown. As you will see, all months have been profitable. But November only barely so, while December proved to be the best month. (April was a starting month, with very small positions). November had its fair share of choppy days, which probably explains my relatively poor results that month.
How I execute the 0DTE Breakeven Iron Condor strategy
So let us go more into details about how I execute this strategy.
I am still developing my execution rules. But I think this strategy will always be a mix of mechanics and art, so to speak. And the most important of all is to manage the total risk exposure throughout the day. As of now, there are no 100 % mechanical rules for when I enter and exit.
But here is a summary of how I execute:
Each trade is an Iron Condor with the short legs between 5 and 15 delta – and the long legs 15 to 30 points further out. The standard trade is to collect approximately the same credit on both the call and the put side. I only sell one contract at the time – but may have up to 4 different positions open at any time. Usually, I collect anywhere from 70 to 250 dollars for the Iron Condor, depending on the deltas and the wings.
Delta: Another Greek letter used in options trading. Tells how much the value of the option will change when the value of the underlying, in this case SPX, changes. Delta is also used to measure the probability of the option being profitable at expiration. A delta 10 in this case means that there is a 10 % probability that the trade will lose money at expiration.
I set the stop loss immediately after entering the trade. I do this in two stages – using the OCO (One Cancels the Other) functionality in the Thinkorswim platform:
Stop loss 1: A stop-limit order on each side where the stop is set at 5-10 dollars away from the total credit received, and the limit price 20 dollars further out.
Stop-limit order: A stop-limit order will execute if the trade price reaches a certan level (the stop price), but only be closed at the limit price or better. If the market moves fast against you, both of these levels may be passed without the stop loss executing.
Stop loss 2: A stop market order 15 – 20 dollars further out than the limit price in the stop-limit order.
Stop market order: The trade will be closed when the price reaches the stop price – at whatever price the market is willing to give at that moment. The benefit of a stop market order is that you know you will get out of the trade. – but there is no guarantee of the price.
So to give one example: I sell the Iron Condor 4820/4850/4755/4725 and receive 175 dollars in credit. I will then set the stop limit order with the stop price at 180 and the limit price at 200. The stop market order would be set at 220. Most losses will be within the stop limit order - and in this case that would be between 5 and 25 dollars.
This two-tier stop loss has served me well so far. In at least 90 % of the cases, stop loss 1 will trigger. But in extreme situations, when the market moves very quickly, stop loss 2 serves as an extra line of defense to make sure I get out if the market skips over the levels in stop loss 1.
Here is an example of how I set up a stop loss in the Thinkorswim platform:
Stop losses are an essential part of this strategy – and must be entered immediately. In my experience, the market can sometimes move very quickly against you in day trading. Pre-set stop losses are the only way to ensure you are able to get out quickly when that happens.
I typically open the first trade within 10 – 15 minutes after the market open. This trade will usually have a quite low delta, up to 10. The distance between the wings will usually be 25 – 30. This trade will benefit nicely if the market stays relatively calm for the next 30 – 60 minutes, but is quite vulnerable if there are sudden moves.
Within the first half-hour I usually also enter a new trade with higher delta and higher credit collected. I may choose more narrow wings on this trade to make it less vulnerable to price movements.
Example trade 1: On New Year Eve SPX opened at 4775.21 and quickly rose around 10 points. Ten minutes after the market open I sold the Iron Condor 4820/4850/4740/4710 for 150 USD. But then the market made a quick turn down and the put side was closed on the stop loss for 175 dollars after only 20 minutes. Later in the day I decided to close the short call for 5 dollars to take down the total risk. Total loss on the trade: 30 dollars.
Example trade 2: The next trade on New Year Eve was opened 23 minutes after the market opened. I sold the Iron Condor 4805/4835/4745/4720 for 235 dollars. This trade stayed in positive territory the whole day – and expired worthless at the end of the day with all of the 235 dollars as profit. The SPX closed at 4766.18 this day.
Throughout the day I may open new trades – but trying to follow a set of principles I have defined for myself:
- I will not exceed the 12.000 USD buying power limit I have set for myself – except in cases where I deem that one or more of the positions are very safe. In my case this means I can have up to 4 positions of 1 contract open on each side at any time. Often I will take off a trade with decent profit to enter a new trade with better prospects.
- I don’t have a strict set of exit rules yet. In the beginning I let the trades expire worthless if the stop loss was not hit. Now I am more flexible, depending on the situation and my total risk. I will definitely let trades run if they have very low delta. But I will also often choose to take off a trade when it reaches a decent profit, both to pocket some money, but also sometimes to balance the positions.
- I try to always have a look at the total risk picture of my positions. Example: If I have three positions open, and they are all negative delta, I may open a positive delta Iron Condor next to balance.
- I avoid having multiple cases of the same strike price to avoid messing up the trade management.
- I try to place new trades with some time distance apart – and when the market seems to have stabilized on some level.
- I avoid trading in the last 30 minutes before the market close. The market can sometimes move too fast during this period – and the risk level can explode in a matter of seconds sometimes.
- During the last hour I will change the stoplosses of the remaining positions to be on the shorts only. This makes it easier to get quickly out if the positions move against me and adds better protection against bad fills. Besides, the long positions usuallly are pretty worthless at this time.
Be aware: This can be a time-consuming strategy. I have executed on average 5 trades per day – and I do think that even with stop losses, you will get better results if you are able to monitor your positions continuously. That means this is not a strategy for everyone.
What are the biggest risks with the 0DTE Breakeven Iron Condor strategy?
The strategy has been profitable every month so far. However, any options trading strategy has risks, and I do expect to experience a losing month soon.
I think there are three main risks to be aware of in this strategy:
- Double stop losses
- Bad fills on the stop losses
- Bad management of the total risks of all the active positions
All risk factors will typically occur in the same environment: Big and sudden moves in the market, especially to the downside.
I will elaborate on each of these, but let us first look at the daily profit and loss graph:
A couple of observations:
- There are very few big losses on single days. And that is why I love this strategy!
- Of 112 trading days 64,3 % have been profitable and 35,7 % have been days with losses
- The average winning day made a profit of 191 USD. The average losing day caused a loss of 118 USD.
- The biggest daily win was 735 USD on December 8
- The biggest daily loss was 712 USD on November 26
When I look at the days with the biggest losses, they are all a result of the three risk factors I mentioned.
Double stop losses
Usually, stop losses will hit only on one side of the Iron Condor. That means the loss will be rather small. And that is the main intention of this strategy. But every now and then the market is so choppy that also the stop loss on the other side is hit. If that happens to more than one position, the losses can start to pile up.
Of my 588 trades in 2021, I hit the double stop loss in 18 trades – or 3,1 % of all trades. Most of them (14 of the 18) occurred in the last quarter of the year. Especially November was a choppy month.
Bad stop loss fills
The other risk is bad stop loss fills. This can occur when the market makes a sudden and big move in one direction – and the stop-limit order is skipped. The trade is then defended by the stop market order further out – and in a fast-moving market with high volatility, this can occasionally lead to a very bad fill.
I don’t have statistics for this, but it has occurred a couple of times, causing unnecessary big losses. November 26, when I had my biggest daily loss so far, was such a day.
Bad management of the total risks of all the active positions
My rule is that I can have up to 4 active positions on each side. That means I have a buying power reduction of up to 12.000 USD.
But I also try to look at all positions together – and assess the total risk at any moment. How well am I positioned if we experience a sudden move up or down in the market?
Managing the total risk is crucial for this strategy in my experience.
What is the worst case? I think it is that all four positions hit the stop loss on one side, and then the market turns violently and I hit the stop losses on the opposite side for all positions as well, possibly with a couple of very bad fills.
What will be my focus in 2022 with the 0DTE Breakeven Iron Condor strategy?
I have traded this strategy for nine months – and the results are so far great. But I think I have still much to learn – and I keep thinking about how I can tweak it. And also: When will it fail? In what situation will I start losing money on this strategy? I would love to hear your thoughts on this!
The main goal for me in 2022 is to understand better what are the best times for entry and exit. Can I define some criteria for when to start and close trades? And are there criteria that will tell me which days I should just stay away from it?
I suspect this may be linked to VIX levels – and also staying away on strongly trending days. But I want to analyze this more thoroughly.
The great thing is that the more trades I do, the better analysis I can do, just using my own data. All the data in this article are taken from my detailed trade log in Excel.
Maybe in a year, I will have a more mechanical list for entry and exit. Or maybe I will have concluded that it is not possible to set up 100 % mechanical rules, but that I have to use my experience and the assessment of my total risk to guide me in which trade to make.
It could also happen that the strategy does not work anymore.
In any case: I look forward to keep exploring!