Options Trading Against Market Declines: The Iron Shark Strategy and Its Performance in 2022

by Andrea Unger

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The Iron Shark strategy is an options strategy designed for the stock market that allows you to profit from the passage of time (it is Delta-Neutral) and to benefit from the decrease in implied volatility (it is Vega-Negative).

This strategy has an exciting feature: an internal protection mechanism against so-called "black swans," namely, unfavorable market events characterized by sharp price drops and enormous bursts of implied volatility.

In this video, we show you Iron Shark's out-of-sample performance updated to 2022, a year characterized by significant stock market declines.

By watching the video, you'll discover: 

- Features of the Iron Shark Strategy 

- Its out-of-sample performance

- Its behavior in 2022 (and in other difficult times for stock markets)

Enjoy! 😎

Transcription

Intro

Hey everyone and welcome back. Today we're going to be talking about an options strategy known as the Iron Shark strategy, cool name!, so we can review what happened in 2022. It was quite a bad year for the markets, especially for equity indexes. So we're going to be evaluating together how this strategy performed in out-of-sample.

So guys, one of the coaches at Unger Academy here, and today we're going to talk about the Iron Shark options strategy.

What is the Iron Shark?

I remind everyone that this is a delta-neutral strategy that aims to take advantage of the passage of time, and it’s vega-negative, so it benefits from a decline in volatility.

It's designed for equity markets, especially the Mini SP 500, whether it’s futures or the index, but it can also be used for high capitalization stocks as well.

Iron Shark Strategy Backtest

So, in yellow, you can see the out-of-sample performance of the strategy from when it was released to today.

You can already see that in the in-sample phase, as is usually the case, we have a much more linear strategy than in the out-of-sample phase, which I’d say is positive.

Although it's also true that for the indexes from 2010 through 2018, we’ve seen a very linear period with few market crashes, except for August 2015, when the market started to show signs of turbulence.

I'm referring specifically to February 2018, the October-November-December quarter of that year, the Covid pandemic, yes we all remember, and certainly also the current period, which is one of the worst starts of the year for equity indexes.

No what's unique about this strategy is that into its core, it has this kind of protective mechanism against so-called "black swans," those unfavorable events characterized by an abrupt decline in the underlying asset and, at the same time, a sharp increase in implied volatility, which is often very damaging to option sellers.

So, this is a strategy that tends to protect itself during sharp market declines.

2022 Performance

2022 was special because we saw a drop in stock prices, but -this is the interesting - there was no real volatility explosion.

Yes, we also saw that the Vix was at relatively high levels, but there was nothing like, for example, the values reached during the Covid pandemic or other events in 2018.

And that is undoubtedly one of the reasons why we’ve seen a relatively large drawdown in the strategy in 2022, amounting to $8,000, which is much larger than the maximum historical drawdown that we’ve seen in the past.

However, all in all, given that the stock indexes are still down significantly since the beginning of the year, I'd say that the strategy, which is still making gains and has recovered from this drawdown, has done quite well.

It's true that we’ve seen the most negative period for this strategy, but if we consider the performance of the indexes, I'd say that we can be very happy with the result.

A result that amounts to about a $2,000 gain since the beginning of the year.

Also consider that trading this strategy on the SPX requires a margin ranging from $10,000 to $15,000, depending on volatility.

Strategy Metrics

So let's go and have a look at the overall statistics of the strategy from its inception until today. The number of trades made by the strategy is 276.

We have a net profit of $109,000. A profit factor of 2.82 and a percentage of profitable trades of 75%.

The average value of profitable trades is $816. While it's $866 for the losing trades, and of course, it’s a negative value, so minus $866, for a total average trade of $395.

Winning trades stay on the market for 17 days on average, while losing trades remain on the market for about 13 days.

As mentioned earlier, the historical maximum drawdown on closed trades is $8,165.

You know, we're looking at some interesting numbers, especially when we relate them to the margins that brokers charge for trading this strategy, as mentioned earlier, which range from $10,000 to $15,000 depending on the level of implied volatility.

Final Thoughts

Here at Unger Academy, we try to let the numbers speak for themselves, and that's why we show backtests also on options strategies.

So, we don't just tell you about the operational structure and the different management rules. But it's also appropriate to do backtests on options strategies, just as we do on futures, to see how well a strategy has performed in the past and the present.

And if any of you are interested in learning more about our systematic approach to the markets, we’ve got something for you. We'll leave you a link in the description. It's a free presentation by Andrea Unger, where he introduces you to his trading method, which he used to win the World Cup Trading Championships in real money trading 4 times.

You can also get, by covering only the shipping costs, the bestseller "The Unger Method" or book a free call, a free strategy consultation with one of our tutors.

Guys, that's it for today.

Please leave us a Like if you liked the video, subscribe to our channel to stay updated on the release of all our new videos!

Until then, we'll see you again next time, soon! Bye-bye for now!

Need More Help? Book Your FREE Strategy Session With Our Team Today!

We’ll help you map out a plan to fix the problems in your trading and get you to the next level. Answer a few questions on our application and then choose a time that works for you.

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Andrea Unger

Andrea Unger here and I help retail traders to improve their trading, scientifically. I went from being a cog in the machine in a multinational company to the only 4-Time World Trading Champion in a little more than 10 years.

I've been a professional trader since 2001 and in 2008 I became World Champion using just 4 automated trading systems. 

In 2015 I founded Unger Academy, where I teach my method of developing effecting trading strategies: a scientific, replicable and universal method, based on numbers and statistics, not hunches, which led me and my students to become Champions again and again.

Now I'm here to help you learn how to develop your own strategies, autonomously. This channel will help you improve your trading, know the markets better, and apply the scientific method to financial markets.

Becoming a trader is harder than you think, but if you have passion, will, and sufficient capital, you'll learn how to code and develop effective strategies, manage risk, and diversify a portfolio of trading systems to greatly improve your chances of becoming successful.