Is trading is a “Zero Sum Game?” Meaning that over time, with a large enough number of trades, your winners and losers will cancel each other out?
At tastylive, we do not believe this to be the case with the way we trade. We see the importance of a large number of occurrences and we think there is an edge in selling option premium. We believe that implied volatility (IV) overstates the expected move and is one reason that trading is not a “Zero Sum Game”. Is there a way we can prove this? Is there something we can do to put the odds more in our favor?
Our study used Iron Condors. We chose them because traders with smaller tastyBITE sized accounts are more comfortable with defined risk trades with a lower margin requirement than undefined risk strategies such as a Strangle. We sold Iron Condors in SPY (S&P 500 ETF) from 2007 to the present with the option series closest to 45 days to expiration (DTE). Each wing was $5 wide. We chose the strikes based on receiving the credit closest to $1.25 for a total credit target of $2.50. Since the wings are $5, this should be a 50-50 play according to those who preach about the “Zero Sum Game.”
The first table showed that our win rate before employing our tastylive strategies was 53% and the average P/L was $11.57. The second table showed what happens after we add managing winners at 50% of max profit when possible. The win rate improved to 62% but the average P/L was $9.95, a small amount lower. When we also add only selling when Implied Volatility Rank (IV Rank) is above 35%, our win rate improved to 70% and our average P/L was much higher. By managing winners and using high IVR, "you can go from a 50/50 shot to 70/30 percent chance of success."
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