Anyone who has watched us for even a short time knows that our studies indicate the optimal time period for selling premium is 45 Days to Expiration (DTE) so here we are providing the results of a detailed study on what deltas are optimal to sell when shorting a strangle. Every premium seller needs to see this.
A study was conducted examining the SPY (S&P 500 ETF) from 2005 to present (15,000 strangles were compared) using options closest to 45 days to expiration (DTE). We compared strangles with short deltas of 50, 45, 40, 35, 25, 20, 15, 5, 2.5, 2 and 1.5.
A graph of the average P/L per trade versus the short deltas was displayed. The graph showed that the average P/L increased along with increasing deltas, in other words the narrower the wings the greater the average P/L (but also greater risk). The greatest rate of change was indicated.
A table comparing the incremental increase of all the short deltas mentioned were displayed. The table included the delta, average P/L per trade and incremental increase on each delta.
The “inflection point” , the degree where the incremental changes steepen the most, was discussed. It was indicated that the speed of P/L change starts to slow down beyond the inflection point towards both sides.
A second graph of the percentage of profitable trades versus each short delta was displayed. The graph showed the area where the inflection point exists. Another table compared the win ratio of each delta. The table showed the changing of the risk/reward. The table included the delta, win ratio and incremental decrease.
Watch this segment of “Market Measures” with Mike Hart (Beef) and Tony Battista for the takeaways and the detailed study results indicating which strikes we should choose for our short strangles.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.