“I wish I had known this before” is what you'll be thinking after seeing the results from this detailed study on strangles and how likely is it that after one side is touched the other side also is touched. This can help you put the odds in your favor.
One of our favorite strategies is to sell one standard deviation strangles with about 45 DTE when IVR is high. We almost always take some “heat” on the trade and sometimes it is a bit more and one of our strikes is touched. We examine what happens after that, specifically, the chances that the other strike is touched after the first one is touched.
Theoretically, delta is the probability of the underlying expiring beyond our strike. The probability of touch (POT) is roughly twice the probability of expiring in-the-money: An example comparing the probability of being in the money (ITM) at expiration to the probability of touching the strike before expiration on a 1 standard deviation call or put with a 16 delta was displayed. The example showed the percentages on both.
A study was conducted using trades in the SPX and VIX data from 1990 to present (6512 occurrences) was displayed. We calculated the SPX 45 day 1 standard deviation expected move using VIX for every day. We then tracked whether the SPX touched the upper or lower calculated expected levels.
A table of the percentage of the trades that expired in-the-money and the percentage of trades that touched before expiration on the SPX from 1990 to present was displayed. The table showed the results of the expected move per side, upside actual and downside actual. What happens after the touch was also examined including how often the other strike is touched. The latter has a direct bearing on how we manage trades.
Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the valuable takeaways and other important information about the probability of touch after touch.
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