These wild markets can drive some to hard liquor but we prefer hard numbers so although our models tell us we should roll the untested side of a strangle after one side is tested we wanted to know the real world stats of how many times the rolled side is then touched and we present the study results here. All premium sellers can benefit from this data.
The Option Jive segment from January 11, 2016 related how when selling strangles and one side is tested we roll the untested side to the new 30 Delta. The Market Measures segment from January 4, 2016 showed the study results of how often a 1 standard deviation strangle has a side touched. This study builds on the previous one.
A table of the actual probabilities of touching the 1 standard deviation strangle bounds were displayed. The table included the percentage the strangle expired in-the-money (ITM) and the percentage it touched before expiration. The table compared the expected (per side) to the upside actual and the downside actual. The table showed that the bounds of touch were lower than expected.
A two part study was conducted using the SPX (S&P 500) and VIX data from 1900 to present with 6500 occurrences, to see how often we touched one side of the boundaries and then touched the new 30 delta rolled side, both upper and lower bound.
Our first measure was of the expected and actual percentages that the 30 delta strike of the rolled strangle short put was touched after a large market sell-off was displayed. The table showed the percentages the new 30 delta upper bound was touched and the percentage that it expired below the new upper bound.
Our second measure was of the expected and actual percentages that the 30 delta strike of the rolled strangle short put was touched after a large market increase. The table showed the percentages the new 30 delta lower bound was touched and the percentage that it expired below the new lower bound.
Watch this segment of “Market Measures” with Tom Sosnoff, Tony Battista and James from the research team for the valuable takeaways and the study results of the probabilities of a touch after you roll a strangle.
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