This segment reveals the results of two studies about managing winning short strangles at 50% of potential profitability to improve returns and a variation of that strategy. This should be of interest to all traders including those who have been managing winners in this way for a while.
The belief in managing winners is a tenet of the tastylive philosophy. By doing so we boost our P/L per day, increase our probability of profit and reduce our time and gamma risk in a position. We ran a study to show why we believe this to be true in which holding a trade to expiration was compared to managing winners at 50%.
A study was conducted using the SPX from 2010 to present. We sold a 1 standard deviation (SD) Strangle on the first trading day of each month using the options closest to 45 days to expiration (DTE). The study compared managing our positions at 50% of maximum potential profit versus holding until expiration.
A table was displayed showing both managing at 50% and holding until expiration for the SPX Strangles. The table showed the results including percentage of profitable trades, average number of days held, average P/L per day, biggest loss and total P/L. Managing winners was the clear winning strategy as can be seen in the results. A key point made was that the vast majority of the profits in the expiration strategy were made in the first 25 days and holding the rest of the way only brought in a fraction of the profit. A second table displayed the percentage of profit (POP) for days 1-25 and days 26-46.
We have shown how managing winner is better than holding until expiration but is there an even better strategy to follow? We know that the probability of touch is about twice the probability of expiring ITM. Given that, does it make sense to close the winning leg of a strangle when the whole trade has reached 50% of max profit and keep the other leg on?
A second study was conducted using the SPX from 2010 to present. We again sold a 1 standard deviation (SD) Strangle on the first trading day of each month using the options closest to 45 days to expiration (DTE). This study compared managing our entire position at 50% maximum potential profit versus closing the winning leg at 50% and holding the remaining leg until expiration.
A third table was displayed showing the results of the second study. The table showed the results including percentage of profitable trades, average number of days held, average P/L per day, biggest loss and total P/L.
Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the takeaways and the results of the study to learn why managing winners is best and if this new method of managing winning strangles is a better choice.
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