Mar 24, 2022 5 min read Options

0 DTE Iron Condor Tranches Strategy V1.0

So I've been doing many backtest refining 0 DTE Credit Spreads but yet to give more context on how I'm trading it. In this post I'll be sharing the current version of how I'm trading 0 DTE.

Background

Before we go into the details, just to give some background and history to this strategy. At least from my perspective, I get to know this strategy from Tammy. You can find her full video on her strategy in her Youtube channel. So that's the starting point.

As I traded it for awhile, tweaking it again and again. The base strategy doesn't seems consistent over different VIX environment. So I've been exploring all over the place to find ways to improve.

Then I learnt that David Sun (TheTradeBuster) is also doing 0 DTE, in his own ways. So I threw a lot of questions at him trying to figure out how he does it. Also in his Discord channel, together with some other folks like Alex and Sean, I put together all the details of this strategy to follow.

Not exactly sure 'whose' strategy is it, not gonna say it's my own invention. Probably the main idea came from David Sun, just that he's doing in his own ways which might not be so easy for normal retail investors like us to follow because he uses automation and some algorithm to execute his trade. I'm just the one writing and sharing it out.

Mechanics

Note that I'm going to use my own configuration of mechanics, quite a number of the configurations are customisable. I'll try to go through them.

Setup - First thing to know is, we sell Iron Condor. Specifically, in separate spread. So we sell Bull Put Spread (BPS) and Bear Call Spread (BCS). (Some people call them Put Credit Spread(PCS) / Call Credit Spread(CCS), I prefer BPS/BCS)

Credit Target / Delta - I don't really target by delta because I find delta varies from broker to broker. I target credit, so for each spread I target $0.80 credit. I will always try to find as close to $0.80 credit as possible. It can range from $0.75-$1.00. Which would get you around 5-8 delta in most cases.

Spread Width - Currently, I'm doing 30 wide because I find it easiest to manage. So far this configuration is personal preference. Some people do 25 wide, some people do 50 wide, some does dynamic. It's not a deal breaker configuration for now. Pick your preference and stick to it. Though I'm working on more test with regards to this which you can see in my other post on 15 wide vs 30 wide. I'll refine more once I get more backtest done.

Profit Taking - Expire. Nothing special to mention here, let it expire. I did backtest on 70% 80% 90%, it takes up too much of the profit without much benefit. So just let it expire but make sure stoploss are always in place.

Stoploss - 200% Stoploss. It's also been backtest that anything around 150% to 200% stoploss would get more or less similar results. So take your personal preference, I'm doing 200%. Means stoploss = 3x credit. Also, the refinement of width might affect stoploss, but lets not go there for now. Wait for version 2.0.

Tranches - THIS IS THE MOST IMPORTANT PART OF THE STRATEGY. At least to me it is, this is actually the key to consistency. So what we do essentially is to enter in interval tranches. Example, every 30 minutes you add a position on both BPS and BCS. Regardless of what the current price action is (although I still check to make sure price stables down before I enter). The result of doing these tranches is consistency, which in a long run provide very consistent income generation.

Sizing - This is not simple to explain but I have to assume you have basic knowledge about Premium Capture Rate (PCR), if not check David Sun's podcast. So to make it easier, I made a 0 DTE sizing calculator to calculate what sizing you should consider depending on your own NLV and defined Max Risk. For PCR, you can use 20% for general estimation. The calculator will suggest if you want to do how many tranches, how many contracts should you do. Note that max risk is referring to full loss of entire spread width, not summing all stoploss.

Timing - So personally, I'm doing 4 tranches of 40 minutes interval (12:20 / 1:00 / 1:40 / 2:20). This is because from the 0 DTE backtest we did on entry timing, 12:20 to 2:20 is the higher win rate period. There are people who does throughout the entire day every 30 minutes, or also only the PM session. Just that I prefer to be particular in staying in the higher win rate zone from backtest data.

Psychology - I find this important too. Don't be bothered by losses. Losses are just part of statistics. It's actually normal to get losses everyday and especially the first few trades. Just believe in the statistics and let the numbers run. Do the same thing consistently over few weeks and you'll understand. You can never win every trade, what you want is to be consistently profitable.

Management / Logistics - this is more of the macro details that during the day when you have to enter multiple tranches, its unavoidable that there might be overlapping strikes. So always check if your new strike overlaps with your existing position. At least for me in IBKR, if that happens it will merge my strikes. Which closes one of the leg and combined into a wider spread. Which kind of mess up the management. Other brokers might not have such problems though, just take note. Another thing is it might ended up the exact same strike as previous tranche. Usually I try to get a different strike (maybe lesser credit) as much as possible unless it's really not possible then I'll add onto the same strike.

Exception - I skip FOMC days, if FOMC is in the middle of intraday. That's my rest day. Or if there's any other similar events that can potentially cause huge swings, I'll skip. With 0 DTE everyday coming, skipping a few more days doesn't hurt.

Summary (My Configuration)

Sell 30 wide BPS+BCS every fix interval at fix credit of $0.80 and setting a stoploss of 200% to each spread.

I'm still working on more testing to further refine it. That's why I label it V1.0 for now. Let's see if it could be improved further to V2.0. For now, it works, stick to it.

My Results

So far I've only been running this exact tranche method from start of March 2022. And I did tweak the stoploss from 200% to 150% then back to 200%. These are my stats so far: