Options Trading: How Early Management Affects Touch Probability
Options Trading: How Early Management Affects Touch Probability
By:Kai Zeng
Research shows shows early exits can cut strike touches by 50% for both puts and calls
- Managing options before they expire can greatly reduce the chance of hitting the strike price.
- On average, puts touch their strikes much less often if managed early compared to holding them until expiration. Calls touch their strikes even less when managed early.
- The difference in touching the strike between puts and calls becomes smaller when managing them 21 days before expiration, which helps in a market that doesn't move in one direction.
In our most recent analysis, we tested five stocks to see how often 10-delta puts and calls actually touch their strike prices. We found puts touched their strikes about half as often as expected, while calls touched their strikes as often as predicted.
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Today, we're exploring what happens when we manage options 21 days before they expire.
This time, we used 45-day options with a 20-delta and included other major indices like QQQ and IWM in our tests. A 20-delta option is expected to touch its strike 40% of the time.
When holding options until they expire, puts touched their strikes about half as often as expected, which matches our previous results. If we managed them 21 days before expiration, they touched their strikes even less, about 25% of the expected rate.
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For calls, while they touched their strikes as often as predicted, and managing them early reduced this to about one-third of the expected rate.
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This strategy of exiting positions early is particularly appealing for traders who sell options for premium and don't have a strong opinion on market direction. That’s because the chance of touching the strike price becomes similar for both puts and calls, even in a strong bull market.
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When we combined puts and calls into a strategy called strangles, managing them early reduced the chance of touching the strike by more than half compared to holding them until expiration.
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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
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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.