Our studies have indicated that managing winners on our go to strategy of Short Strangle at one Standard Deviation (16 Delta) should occur at 50% of max profit but does that hold true for short strangles with deltas higher or lower deltas? We ran a study to give us some guidance.
A large study (30,000 trades) was conducted using the SPY (S&P 500 ETF) from 2005 to present. We compared short Strangles with Deltas of 2,5,10,15,20,25,30,35,40,45, and a Straddle with a 50 Delta. We chose an expiration closest to 45 DTE. A graph of the Duration versus the Delta of the Short Strangles/Straddle was displayed. The graph showed that, in general, the greater the delta, the longer the duration was to manage winners at 50% of max profit although the premium will be higher.
A graph of the credit received versus the Days Until Expiration (DTE) was displayed. The graph showed that the higher the delta the longer the duration to manage but the greater the premium collected. The graph also showed that the 50 delta Straddle dramatically fell in the last 7 days (a high ROC) so why would we manage it at 50%? Our research supports being disciplined and closing at 50%. Gamma risks explode as we get close to expiration. A final graph of annualized Return On Capital (ROC) versus Delta was displayed. The graph showed where annualized ROC peaks. Additional information can be seen at “Straddle/Strangle Theory and Practice", Skinny on Options Data Science from December 3, 2015.
Watch this segment of Market Measures with Tony Battista, Pete Mulmat and Kai (from the research team) for the valuable takeaways, some additional important insights from Tony and Kai and our detailed study results managing winners for various deltas.
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