The margin to establish a short Straddle would result in a huge hit to Buying Power (BP) in a tastyBITE-sized account. A way to reduce this hit is to turn the short Straddle into an at-the money (ATM) Iron Fly, which is a synthetic equivalent. We believe in managing winners but if the position never gets to the manage area and it is looking like a loser approaching expiration then we would roll the trade. The question is do we roll the trade to the same strike or do we re-establish the trade at the new ATM strike?
Our study was conducted in the SPY (S&P 500 ETF), from 2005 to the present. We sold the ATM Iron Fly in which the wings had a Delta of 10. We chose the expiration cycle closest to 45 Days To Expiration (DTE). At 2 weeks before expiration we rolled the position to the next cycle closest to 45 DTE if it was a loser. We compared using the same strikes or new ones using the ATM strike for the Straddle portion and the 10 Delta for the wings.
The results of rolling the trade forward using either choice were clearly superior and had a higher Probability Of Profit (POP) to holding the trade to expiration. Rolling the trade forward using the same strikes was more profitable but rolling to the new ATM strike and 10 delta wings produced results much more consistent with a normal distribution and more consistent overall. Tom and Tony stressed the importance of sticking with one method to achieve the best results and noted, "extending duration on your liquid underlyings is something you should do."
For more information on Rolling see:
Options Jive from January 11, 2016: " Rolling Strangles - When, Where, How"
Market Measures from February 18, 2016: "Rolling Strangles"
Options Jive from May 18, 2016: "Defending Trades | Rolling to Increase Probabilities"
Watch this segment of tasty BITES with Tom Sosnoff and Tony Battista for the important takeaways and the results of our study on rolling an ATM Iron Fly with 10 Delta wings using the same strikes or re-establishing at the new ATM and new 10 Delta.
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