This segment reveals the results of a multi-part study to determine the optimum strategy for covering a profitable short one standard deviation strangle. This should be of interest to all traders who short strangles.
Generally speaking, the tastylive philosophy has been to take profits on short straddles at 25% and on short strangles at 50%. The study revealed in this segment measured different strategies for taking profits against the 50% “rule” on strangles.
A study was conducted from 2013 to present using the SPY, GLD, EWW, TLT and IWM when IV Rank was trading above 50%. The study consisted of selling a 1 standard deviation strangle on the first of the month using the expiration closest to 45 days to expiration (DTE). The study tested three different strategies. The first was to close one contract when the IV Rank fell below 50% and hold the other until expiration. The second strategy closed both contracts when IV Rank fell below 50%. The third was to hold both contracts until expiration. A table displayed the results of all three strategies. The table showed the P/L, percent of profitability, average days held and average P/L per day.
We also tested the strategies against our 50% “rule”.
A second table displayed the results from 5 different strategies. The first was managing 1 contract at 50% of max profit and holding 1 until expiration. The second was managing both contracts at 50% of max profit (the tastylive “rule”. The third, fourth and fifth were the same ones from the first table, closing 1 contract when IVR fell below 50% and holding 1 until expiration,. closing both contracts when the IVR fell below 50% and holding both until expiration. The table showed the P/L, percent of profitability (win rate), average days held and average P/L per day.
Watch this segment of "Market Measures" with Tom Sosnoff and Tony Battista for the takeaways and to see what the hard data shows about scaling out of profitable positions.
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.