You can hear or read about selling premium and the importance of Implied Volatility (IV) elsewhere. A short Straddle or a short Strangle are widely known strategies. What makes us unique is that we are data driven based upon serious studies. Many other sources focus on managing losers. We may be the only place that, driven by our studies, focuses on managing winners. Why for instance, do we manage our winning Straddles at 25% of maximum possible profit when we can? How does managing winners improve our Probability Of Profit (POP) and how often do losing Straddles become winning trades?
Our study was conducted in SPY (S&P 500 ETF) using data from 2005 to the present. Using options with 45 Days To Expiration (DTE) we sold the at-the-money (ATM) Straddle everyday. We then compared holding the trade to expiration or managing at 25% (if possible). We ran the study and then focused on our winning trades to see if we could learn anything more.
A table of the results was displayed. The table included the success rate, average duration, average P/L per day and average P/L per trade. The table showed that managing at 25% increased the POP from 65% to 81% while decreasing duration in the trade significantly. A table isolating only the 81% of winning Straddle trades showed the percentage of these trades with a negative P/L at some point before expiration was 73% and the average number of unprofitable days was 6. Roughly 25% of trades would have expired unprofitable if not managed (with a loss of $134). But by managing winners, the average trade became profitable at +$67.
Tom noted, “So your 81% right and 73% of those trades have a negative P/L for an average of 6 days. That’s the context that everybody needs and is what is so cool about our research. The key is the ability to stay small enough that it doesn't bother you.”
For more information on Short Straddles see:
Market Measures from May 12, 2016: "Straddles | Managing Earlier"
Market Measures from June 6, 2016: "Straddles: No Pain, No Gain"
Market Measures from July 27, 2016: "Product Indifference: Analyzing Straddles"
Market Measures from August 29, 2016: "Straddles: Probability of Touching Breakeven"
Market Measures from September 16, 2016: "Capped Straddles: Synthetic Alternative"
Watch this segment of Option Jive with Tom Sosnoff and Tony Battista for the important takeaways and the results of our study on managing winning Straddles at 25% and what we learned about win rate, duration of the trade and how losers could become winners.
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