Iron Shark Options Strategy: How did it perform in 2021? Backtest vs Live

by Francesco Placci

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Options trading is a great way to increase the diversification of our portfolio. 

In today's video, we talk about the Iron Shark strategy, a delta-neutral options strategy that aims to sell volatility and profit from the passage of time. 

Compared to other options strategies, the Iron Shark has an important advantage. It's equipped with a protection mechanism against the so-called "black swans" (I.e., those sudden events that can be potentially devastating for option sellers.)

Want to know more about its real performance in 2021 and the previous years? 

In this video, you'll find a summary of how it performed in 2021 (when it made a return on margin of over 80%) and of its out-of-sample and backtest performances over the last decade.

Enjoy! 😎

Transcription

Hey guys, welcome once again! One of the coaches of Unger Academy here and can you believe it? We are approaching the end of the year, and what a better time to make a quick recap video on the Iron Shark strategy performance in 2021?

Iron Shark Strategy Backtest

So, here you can see the backtest of the Iron Shark strategy. It's divided into three areas: blue, orange and yellow. Now, the yellow area corresponds to the out-of-sample period of the strategy that started when we launched the "Iron Shark" training program with the Unger Academy. The orange area corresponds to the out-of-sample period of the strategy that started with the webinar that we made with Algoritmica. And finally, the blue area corresponds to the backtest period, the period when we developed this strategy. Well, to tell you the truth, the strategy was already live from early 2017, but it doesn't matter.

What Is the Iron Shark?

For those of you who are not familiar with this kind of strategy, I can tell you that this is a delta-neutral, non-directional strategy for options whose purpose is to sell volatility and profit from the passing of time. Unlike traditional options selling strategies, it’s provided with a mechanism of protection against the so-called "black swans", that is, those violent and sudden market crashes that can damage option sellers a lot. This strategy is obviously covered in our training programs, just like the other strategies for crypto and volatility trading, and its main purpose is to provide further diversification to portfolios of traditional trading systems. 

 Performance in 2021

The part of the equity curve that starts from this dotted line here, so this portion of the equity line, corresponds to 2021. In this period, the strategy produced a return of around $9,500 with a relatively contained drawdown of about $3,000. 

It hasn't been one of the best years for this strategy, but it is good to see that it continues to perform pretty well compared to the in-sample phase, although, as you can see, the in-sample phase looks a bit more linear. However, we should keep in mind that from 2010 to February 2018, the market went through a bullish linear period with very few market crashes - actually, only a few days in August 2015. On the other hand, during the out-of-sample phase, we had the nasty drawdowns of February 2018, the so-called "Volmageddon," in which the VIX spiked over 100% and caused some funds to fail. Then we had the drawdown of October-December 2018. And then, of course, the COVID pandemic. So it is pretty normal that the equity line is slightly more jagged in this area of the chart.

So, to sum it up, the trend of the strategy was affected by a slight rise in volatility, but as you can see, all in all, the shape is more or less the same.

The Strategy's Metrics

Back to the metrics of the strategy, we need to consider the $9,500 profit made by strategy in 2021 in relation to the margin required by the brokers to trade the strategy, which can range from $10,000 to $12,000 depending on market phases.

So we're talking about a return on margin between 80% to 90%. All in all, the drawdown of around $3,000 is quite contained. However, I remind you that this is a close-to-close drawdown. The intraday drawdown, so the maximum intraday drawdown, is around $5,000.

If we take a look at the metrics of the strategy on a longer term, we can see that its total profit is $107,000 starting from 2010 until today, with a maximum close-to-close drawdown of $4,258. The winning trades are 75%, and on average, a winning position stays open 17.86 days while a losing position is closed earlier and stays open for only about 13.5 days.

Conclusions

So, to conclude, I'd like to say that all in all, the strategy did well. It continued to earn while staying more or less in line with its past results, even if there was a slight increase in volatility.

Here at Unger Academy, we try to let the numbers speak for themselves, and this is the reason why I showed you the backtest of this options strategy. We don't just tell you about it and explain its setup, but we also want to make some backtests, although we need to say that they can't be as accurate as the backtests of trading systems for futures. However, it is the only way to check the validity of a strategy.

If you're interested in understanding more about our systematic approach to the markets, we're going to leave you a link in the description of this video. It's a very interesting video by Andrea Unger in which he explains the details of his method, which let him win the world cup trading championships not once, or twice, or three but four times, and I'm sure that you're going to find it very interesting.

And with that, our video is over.

Goodbye everyone! I will see you in our next video! Bye-bye!

 

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Francesco Placci

Hi, I'm Francesco Placci, a professional trader since 2005 thanks to the systematic approach to the markets.

My skills range from trading on index futures to bonds, from stocks to commodities, with a particular focus on volatility and options, which I consider to be among the most versatile and fascinating instruments available to traders.

After an experience with leading Italian credit institutions where I learned the basics of institutional finance, I became a successful independent trader, with great personal satisfaction.

Founder of Algoritmica.pro, in 2019 I joined Unger Academy as head of Research and Development.