When selling premium using undefined risk, Delta Neutral strategies such as short Strangles and Straddles, tastylivers will have a very high Probability Of Profit (POP) and a high win rate, especially if they follow our rules on managing winners. Eventually though, every trader will experience a loser and with Straddles and Strangles, the average losing trade, although less frequent, will be a multiple of the average winning trade. That leads us to ask, how long does it take to recover from a loss?
We sampled from a large pool of trades. When a loser occurred, we continued to put on new trades until breakeven was achieved and tracked how many calendar days it took. We reestablished trades and did not roll the positions. Our study was conducted in the SPY (S&P 500 ETF) and TLT (Bond ETF) using data from 2005 to the present. We chose the option expiration cycle closest to 45 days to expiration (DTE). We sold at-the-money (ATM) Straddles managed at 25% of max profit (if possible) and 1 Standard Deviation (SD) Strangles managed at 50% of max profit (if possible). We put on the trades every day. We then sampled 500,000 trades from this set of data to determine the expected recovery time after a loser occurred.
A table of the results comparing the amount of days needed to recover on both SPY Straddles and TLT Straddles was displayed. The table broke down the results for each ETF into three categories, those were: 75% of trades took fewer than “x” days to recover, 50% of trades took fewer than “x” days to recover and 25% of trades took fewer than “x” days to recover. A second table displayed the data for Strangles using the same setup. The recovery time for Strangles was longer than that of Straddles because the ratio of average loser to average winner was higher.
Tom added , “To put this in perspective, there is not that big of a difference between Bonds and Stocks. In both cases it took some time to recover. It’s important to know what you’re up against and the statistics on how long it will take to recover on a trade gone wrong.”
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the results of an important study on how long it should take to recover from losses.
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