Higher BPR Doesn’t Mean Higher Risk
Higher BPR Doesn’t Mean Higher Risk
By:Kai Zeng
We compared strangles and iron condors to understand the practice of “buying power reduction”
Buying Power Reduction (BPR) Simplified for Non-Traders
When you buy or sell stocks, some of your investment money is held back to cover potential losses. This is what's known as buying power reduction (BPR). Think of it as a safety net to ensure you have enough funds in case the investment doesn't go as planned.
For strategies like strangles, where you predict stocks will stay within a certain price range, the BPR is about 20% of the stock price. If a stock is volatile, the cushion may increase. For more conservative approaches, like iron condors, which set defined profit and loss levels, the BPR is much lower—between 5% and 30%.
Right now, the BPR for a particular strangle strategy is five times higher than for a $5 wide iron condor strategy. During the past two decades, it’s typically been four times higher. This raises a question: Does a strangle strategy naturally carry more risk?
To find out, we tested with the S&P 500 ETF (SPY) and Amazon (AMZN), using two strategies:
- Strangles based on a 20 delta.
- Iron Condors with 20/10 delta.
And two timing approaches:
- Holding positions until they expire.
- Exiting positions 21 days before expiration.
In our study with SPY, we found iron condors prone to loss levels similar to losses with strangles but with a lower success rate.
.jpg?format=pjpg&auto=webp&quality=50&width=1000&disable=upscale)
Managing trades 21 days early improved both strategies but didn't close the gap entirely.
.jpg?format=pjpg&auto=webp&quality=50&width=1000&disable=upscale)
With AMZN, the trend was similar: Iron condors faced the same level of losses as strangles, with early selling improving outcomes.
.jpg?format=pjpg&auto=webp&quality=50&width=1000&disable=upscale)
.jpg?format=pjpg&auto=webp&quality=50&width=1000&disable=upscale)
The big takeaway? A higher BPR doesn’t automatically mean more risk with strangles. Lower risk isn’t necessarily tied to how much of your funds are reserved.
Key Points to Remember:
- BPR is a way to gauge investment risk, but more set-aside funds don’t mean more risk.
- Strangles often require a larger BPR than iron condors, but actual losses in many cases were smaller than expected.
- Selling investments 21 days early can cut down on big losses, no matter the strategy.
Kai Zeng, director of the research team and head of Chinese content at tastylive, has 20 years of experience in markets and derivatives trading. He cohosts several live shows, including From Theory to Practice and Building Blocks. @kai_zeng1
For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.
Trade with a better broker, open a tastytrade account today. tastylive, Inc. and tastytrade, Inc. are separate but affiliated companies.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.