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Strangles: Choosing Strikes - Dec 8, 2015 | Market Measures
This segment reveals a study on whether our one standard deviation strangle is the best to sell or if a different strike selection would work better.
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      Market Measures

      Strangles: Choosing Strikes

      Dec 8, 2015

      We believe in testing every market assumption and this segment tests our long held belief in selling one standard deviation strangles against some variations. Find out the study results and what may work best for you.

      Choosing the right strikes is important when seeking to make high probability trades. We know from repeated discussions of skew that Puts that are equidistant away from the current price of the underlying will trade more expensively than calls. We also know that volatility tends to overstate the expected move. Perhaps we should move our strikes closer than our typical 16 delta?

      We ran a study in the SPY (S&P 500 ETF) from 2005 to the present. We entered the trade on the first trading day of the month and used the expiration closest to 45 days to expiration (DTE). We compared different strangles. First we sold ½ standard deviation (SD) strangles with each call and put 69% out-of-the-money (OTM) or a 30 delta, then we sold 1 standard deviation strangles with each call and put 84% out-of-the-money (OTM) or a 16 delta.

      A table of of the results on both the 1 standard deviation (SD) strangle and the ½ standard deviation strangle were displayed. The table included the P/L, average P/L per trade, average credit and largest loss for both.

      A second table of short strangles with a put closer to the money (½ standard deviation) and the call further from the money (1 standard deviation) was displayed. The table also included a short strangle where the put was further from the money (1 standard deviation) and the call was closer to the money (½ standard deviation). The table included the P/L, average P/L per trade, average credit and largest loss for both. One clear choice ends up standing out as best.

      Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the takeaways and the results of the study which single out the optimal strikes to use. Is it our old one SD strangle or is it something new?

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