The options markets are a “Zero-Sum Game” in which for every dollar in profit there has to be a dollar lost. This has been twisted to mean that trading in options is also a “Zero-Sum Game” and one cannot be profitable in options over the long run. How does Implied Volatility (IV) impact the equation and how can managing winners put the odds even further in your favor?
Theoretically, a Straddle is a 50/50 bet. We don’t believe in buying Straddles. We only believe in selling them. It’s because IV almost always overstates actual volatility. Our study was conducted in the SPY (S&P 500 ETF) using data from from 2005 to the present. We took data every 5 days for occurrences. We sold Straddles and compared managing at 25% of max profit and also filtered for instances when IV Rank (IVR) was above 35.
A table of short Straddles held to expiration with no management and not factoring in IV was displayed. It showed that the win rate was 64% and the median average P/L per trade was $1.19. A second table showed how managing winners at 25% of max profit improved the win rate and the median P/L per trade. A final table showed how limiting to trades when IVR was above 35 slightly lowered the win rate but boosted the median P/L per trade to almost double what it was before managing.
For more information on Zero-Sum Game see:
Market Measures from December 15, 2014:"Zero Sum?"
Best Practices from August 17, 2015: "tasty Tenets"
From Theory To Practice from March 23, 2016: "A Pair of Zero Sum Games"
Watch this segment of Options Jive with Tom Sosnoff and Tony Battista for the important takeaways and why the Implied Volatility factor and managing winners can turn what might seem to be a “Zero-Sum Game” into a profitable strategy over the long run.
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