A naked short call is not allowed in an IRA account so Short Straddles and Short Strangles are not allowed either. LIZ and JNY’s solution is to add a long out-of-the-money (OTM) call. When done with a Strangle they call this a Jade Lizard. The “Market Measures” from March 7th, 2016 was Part One of the study on Jade Lizards and Part Two was on March 9, 2016. When a long OTM Call is added to a Short Straddle, it's sometimes referred to as a “Big Lizard." How does this strategy perform and do our frequently used strategies like managing winners at 25% of max profit work on them?
A Big Lizard involves selecting the long call that makes the net credit greater than the width of the call spread. This completely eliminates upside risk. Our study was conducted using SPY (S&P 500 ETF) from 2005 to 2015. Using options closest to 45 days to expiration (DTE), we sold the at-the-money (ATM) Straddle and bought the closest OTM call that would eliminate risk to the upside, by collecting premium greater than the width of the call spread. We then compared holding to expiration, managing at 25% of max profit or combining managing at 25% with exiting at a loss of 2x premium received.
The trades proved profitable with a high success rate; however, these trades have a very low chance of reaching max profit at expiration due to the nature of the Straddle. That leads to the next question. How does aggressively managing winners impact the results? The results were shown in a series of tables. The first table displayed the results for holding until expiration. The table included the percentage of trades profitable, average number of days in the trade, average P/L per trade and average P/L per day and largest loss. The second table compared holding to expiration versus managing at 25% of max profit (if possible). The third table compared expiration versus managing at 25% versus managing at 25% or exiting at a loss 2x the credit received. Holding to expiration was the clear loser.
For more information on Managing Straddles and Strangles see:
Market Measures from May 14th, 2015: “Straddles | Managing Winners”
Market Measures from June 19th, 2015: “Straddles | Managing Winners and Losers”
Market Measures from January 26th, 2015: “Managing Winners | Exiting based on Duration”
Market Measures from April 20th, 2016: “Manage Winners and Close Early?”
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the important takeaways and the results of our study on Big Lizards, including using the tastylive strategy of managing winners.
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