Others claim that trading is a “Zero Sum Game”. They state that over time, with a large enough number of trades, your winners and losers will cancel each other out. At tastylive we do not believe this to be the case with the way we trade. We see the importance of a large number of occurrences and we think there is an edge in selling option premium. We believe that Implied Volatility (IV) overstates the expected move and is one reason that trading is not a “Zero Sum Game”. Is there a way we can prove this? Is there something we can do to put the odds more in our favor?
Our study used Iron Condors. We chose them because traders with smaller tastyBITE sized accounts are more comfortable with defined risk trades with a lower margin requirement than undefined risk strategies such as a Strangle. We sold Iron Condors in SPY (S&P 500 ETF) from 2007 to the present. We chose the option series closest to 45 days to expiration (DTE). Each wing was $5 wide. We chose the strikes based on receiving the credit closest to $1.25 for a total credit target of $2.50 and since the wings are $5 this should be a 50-50 play according to those who preach about the “Zero Sum Game”.
The first table showed that our win rate before employing our tastylive strategies was 53% and the average P/L was $11.57. The second table showed what happens after we add managing winners at 50% of max profit when possible. The win rate improved to 62% but the average P/L was $9.95, a small amount lower. When we also add only selling when Implied Volatility Rank (IVR) is above 35% now our win rate improved to 70% and our average P/L was much higher at $36.51. By managing winners and using high IVR, "you can go from a 50/50 shot to 70/30 percent chance of success".
For more on Zero-Sum Game see:
Market Measures from December 15, 2014: "Zero Sum?"
From Theory To Practice from March 23, 2016: "A Pair of Zero Sum Games"
Watch this segment of tasty BITES with Tom Sosnoff and Tony Battista for the valuable takeaways and the resutls of our study which should convince all traders of the fallacy of the claim that trading is just a “Zero Sum Game”.
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