This segment reveals the results of a study comparing short Strangles to short Iron Condors in order to provide guidance for those trading accounts which cannot place unlimited risk trades. This should provide some perspective for every trader.
Numerous studies by tatytrade's research team and years of experience from traders tells us that undefined risk trades outperform defined risk trades. The problem is that retirement accounts (IRAs, 401ks) cannot place undefined risk trades.
Defining our risk though, lowers our potential reward. Increasing size to compensate results in no longer staying small and one bad trade could do a lot of damage. We designed a simple study to illustrate that.
We conducted a study using the SPX from 2005 to the present. On the first trading day of each month (124 occurrences) we sold a Strangle with a 90% out-of-the-money (OTM) call and put. We then sold a 20 point wide Iron Condor using the same short strikes as the Strangle. Both were held to the close prior to SPX settlement.
A table was displayed of the 90% OTM call/put Strangle and the 20 point wide Iron Condor with 90% OTM short strikes. The table showed the P/L, win rate, average trade P/L standard deviation, average realized return on capital (ROC), average buying power reduction (BPR), average credit and largest loss. A graph showed the running P/L of both strategies over the last 10 years.
Watch this segment of "Market Measures" with Tom Sosnoff and Tony Battista for the takeaways and to see what the data shows on the differences between selling a Strangle or a wide Iron Condor with the same short strikes.
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