We like to sell option premium, especially Strangles in high Implied Volatility (IV) environments. These short Strangles profit from small to no movement in the market when the market's expected move is much greater than the actual. The less the market moves the better our short Strangles perform. Can this relationship give us an opportunity to turn a losing short Strangle position into a winner?
The Market Measure, “Does the Market Have a Memory?”, from June 9th, 2016, showed how the market often does not move much after testing a 1 Standard Deviation (SD), 45-day move and had a small upward bias. Can we then benefit by turning our tested short Strangle into a short Straddle? Our study was conducted in the SPY (S&P 500 ETF) from 2005 to the present. Using options with 45 days to expiration (DTE) we sold 1 SD Strangles and looked at when one side was tested. We compared staying with the tested Strangles and managing at 50% of max profit (if possible) to rolling the tested Strangles out in time and into Straddles at the tested strike and managing at 50% of the initial credit (if possible).
The strategy is meant to take advantage of the results of the study we mentioned above that the market does not tend to move much after a 1SD move. A results table was displayed. The table showed that Strangles that were tested and then rolled into at-the-money (ATM) Straddles at the tested strike had a better median P/L and win rate. The roll though did result in increased risk.
For more information on Rolling Strangles & Straddles see:
Market Measures from July 27th, 2015: “Straddles | Short Term Protection”
Market measures from August 19th, 2015: “Rolling Straddles”
Market Measures from February 18th, 2016: “Rolling Strangles”
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the key takeaways and the results of transforming tested short Strangles into longer dated short Straddles.
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