Today, on this segment of "Market Measures", Tom Sosnoff and Tony Battista examine whether to roll the untested side or the tested side of a short strangle.
Rolling is a significant part of our defensive strategy. It allows us to reposition a trade that has gone against us. A recent segment of Market Measures (06/26/2015) revealed a study by the tastylive research team that indicated the best time to toll a strangle was when one of the strikes was breached. The last study tested rolling the untested side while this study examines rolling the tested side and compares them.
An example using the SPY was provided. On 02/02/2015 the SPY was trading at $202. A one standard deviation strangle consisting of a $184 put and a $211 call was sold. The $211 strike was breached on 02/20/2015. The study compared rolling the put to the $206 strike (0.30 delta) versus the $211 call to the $216 strike (0.16 delta).
The study tested the SPY from 2013 to the present. On the first of the month a strangle was sold with 45 DTE. When one side was tested we rolled the untested side to the 0.30 delta compared with the tested side to its initial probability (84% OTM). A table showed the results. The P/L , win rate, average total credit, average days until roll and average P/L per day were shown.
Takeaways:
The better choice increased profits by more than 50% and the win rate by more than 10%.
There is a flaw in one of the strategies that sometimes guarantees a loss.
Watch this episode of "Market Measures" with Tom Sosnoff and Tony Battista for the results of this study on whether rolling the tested or untested side of a short strangle is best.
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