The Option Jive segment from September 6, 2016, "Why Manage at 25%, Not 50% for Short Straddles" showed how our studies demonstrated that winning trades in short Straddles should be managed at 25% of max profit as opposed to 50% for Strangles. So why do we manage Strangles at 50% and not at 25%?
Our study was conducted in the SPY (S&P 500 ETF) using data from 2005 to the present. We chose the options expiring closes to 45 Days To Expiration (DTE). We sold the 1 Standard Deviation (SD) Strangles, meaning they consisted of a 16 Delta Call and a 16 delta Put. We then managed the trades at 25% of max profit if possible, 50% of Max profit if possible or we simply held the trades until expiration.
A table of the results of the SPY Short Strangles was displayed. The table included the average P/L and success rate on Strangles managed at 25%, 50% or held to expiration. The highest success rate was in managing at 25%, just like Straddles; however, these numbers don’t tell the whole story. A second results table included the average days in a trade and the average P/L per day. The results showed that managing at 50% of max profit produced the best avg P/L per day. A final table compared the metrics of the change from managing at 25% to 50% versus managing at 50% to waiting until expiration. Once again managing at 50% was a better choice.
For more information on Managing Winners see:
Market Measures from January 26, 2016: "Managing Winners | Exiting Based on Duration"
Market Measures from April 13, 2016: "Take Off Winners, Before They Become Losers"
Market Measures from April 20, 2016: "Manage Winners and Close Early?"
Market Measures from August 5, 2016: "Managing Strangles - Performance"
Watch this segment of Options Jive with Tom Sosnoff and Tony Battista for the key takeaways and the detailed results of our study to find out why we default to managing winners at 50% of max profit on Short Strangles.
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