We want to see every tastyliver succeed. We have done numerous studies on short Strangles because it is our favorite way of selling option premium. Our studies have revealed many things and probably the two most key things are the importance of managing winners and selling in high Implied Volatility (IV) environments. Today, we are going to visualize the performance of all occurrences to provide proof of why we should manage winners and sell when IV is high.
Our study was conducted in the SPY (S&P 500 ETF) from 2005-2015. We sold Strangles on every trading day (2700 Occurrences) using options closest to 45 days to expiration (DTE). Then we compared results of holding to expiration or managing at 50% of max profit. A graph plotted the returns. Most of the returns were profitable. The key though was to see the number of trades that would not have been profitable if we hadn’t managed winners at the 50% mark. A table of the results showed that while managing winners didn’t stop the largest losses it turned half of the small ones into winners.
We then took our results and sorted it for various IV ranges at order entry. We once again plotted our trades for profit or loss but instead of the other axis in our graph being time it was instead the credit received. The ranges in the VIX were 0-15%, 15%-20%, 20%-25% and 25%+. What could be seen visually was how in low IV markets the Strangles collected less premium but experienced less severe losses. Strangles tends to yield a higher return when IV increases and improved our overall P/L. Managing winners or entering trades in high IV markets didn’t help reduce the tail risk.
For more information on Managing Winners see:
Market Measures from December 4, 2015: "Managing Winners | Varying Profit Targets"
Market Measures from April 20, 2016: "Manage Winners and Close Early?"
Market Measures from January 26, 2016: "Managing Winners | Exiting Based on Duration"
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and a visual demonstration of the importance of both managing winners and selling in high IV environments when selling Strangles in order to collect more premium and improve overall P/L.
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.