No qualifying author-owned investment thesis was confirmed in this post.
no investment thesis: post is about execution slippage on neutral SPX iron condors; no directional view on an identifiable asset
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I've been running systematic short vol on SPX weeklies and single names for a while. Over the last quarter I noticed my actual returns were consistently coming in 15-20% below what my model projected. Not on any single trade, just a slow persistent bleed across 50-60 ICs that shouldn't have been there.
I assumed it was my vol surface assumptions or that my wing placement was sloppy. Spent weeks adjusting strikes, moving DTE around, changing delta targets on the short legs. Nothing closed the gap because the strategy wasn't the problem.
Finally started logging every fill against the displayed mid at the moment I submitted. On a 4-leg IC where the platform showed mid of $2.80, I was consistently getting filled at $2.55-2.65. Fifteen to twenty five cents per spread, every time, across hundreds of contracts. That was the entire gap between modeled and actual returns. Mid on a multi-leg order isn't fair value of the spread, it's just the midpoint between what someone will pay you and what you'd have to pay them. Those are not the same number and the distance between them is where your edge goes.
Three things I changed that measurably improved it.
First was timing. Putting on SPX spreads in the first 30 minutes after open was giving away 10-15 cents vs the same spread at 11am. Exact same strikes and DTE, materially different credit received. Vega is all over the place at open and the MMs price their own uncertainty into the width of the spread. I was basically paying for their hedging risk every morning and didn't realize it.
Second was experimenting with legging vs combo orders. I know this is controversial and I'm still not fully committed to it. On days where I have a strong directional lean I'll sell the short strike first and add the long wing once delta moves my way. I've been burned on it twice, both times during a fast move where I was naked longer than I wanted to be. But across the sample the improvement in credit received has been about 8-12 cents per spread vs a combo fill. Whether the tail risk of getting caught without the wing is worth that improvement is a personal risk tolerance call and I'm genuinely undecided.
Third was accepting that the greeks my broker displays in real time are not tradeable numbers. They're based on last print or theoretical mid, not on where the position would actually clear right now. Had a 30 delta put spread showing theta of $14/day. When I tracked where I could actually close it each day, real daily collection was running closer to $11. Twenty percent haircut on displayed theta is a big deal if you're sizing positions based on expected decay.
Practical change to my process: I now underwrite every strategy assuming I lose 8-10% of mid on combined entry and exit. If it doesn't work with that haircut baked in it doesn't work. It just looks like it does on a risk graph that assumes theoretical fills.
Curious if anyone else has done this kind of tracking systematically, especially on wider spreads where the bid-ask on individual legs starts getting ugly.