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Market Measures

Scaling | Increase Contracts or Delta?

Aug 3, 2016

A trader who is new to the concept of selling premium should, and usually will, start off with a contract size of 1. Eventually, the trader, if successful, will want to take on more risk in search of increased profits. The choice then is between increasing trading size or selling options that are closer to the price of the underlying. Is there a better choice between the two when scaling up the risk?

Our study was conducted in the SPY (S&P 500 ETF) using data from 2006 to the present. On each trading day using the 45 Days To Expiration (DTE) option cycle we sold 2 contracts of the 16 Delta Strangle and sold 1 contract of the 30 Delta Strangle. We then compared the overall profitability, capital efficiency and notional exposure of each approach.

A table of the results of capital efficiency and exposure compared the average P/L per trade, Probability Of Profit (POP) and largest loss. Though trading two contracts of the 16 delta strangles made more money overall, it used more leverage and became a less efficient use of capital. A graph comparing the average maximum Return on Capital (ROC) versus the average notional exposure on the different Strangles was displayed. The graph showed that the average of the 30 Delta Strangle was much greater than the two 16 Delta Strangles and the notional exposure was much less.

Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the results of our study comparing scaling up through Deltas or contracts.

This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

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