How to Manage Short Strangles
How to Manage Short Strangles
By:Josh Fabian
As tastylivers, we have an arsenal of strategies available depending on the market. In periods of low implied volatility (IV), we have strategies. When IV spikes, or at least wakes up long enough to get off its ventilator, we have other strategies. You might say we are - wait for it - a jack of all trades. But it is not just the strategy with which we are concerned, it is also how we manage the trade.
Undefined risk trades are usually our strategy of choice for a few reasons. Premium tends to come in more quickly. Fewer legs on a trade usually means a trade is easier to get into and out of when we want. They also tend to collect the most in premium. Optimizing our probabilities of success can often rest on when we close a winning trade. In a recent episode of Options Jive, the team took a look at strangles and when a winning strangle should be closed.
A strangle consists of selling a naked call and naked put in the same underlying, with the same expiration but with different strike prices. Both options typically have strike prices just outside the one standard deviation expected move.
Compare that with a straddle, where both the put and call have the same strike price. A straddle will bring in more premium than a strangle. That should make sense since both options are at-the-money (ATM). When selling a straddle, we know we want to close out those trades when they have reached 25% of their maximum potential profit. If we want to close straddles out at 25%, is that also the place to close strangles? Depends…
The research team took a look at selling one standard deviation strangles in SPY with 45 days until expiration (DTE) going back to 2005. They then compared closing out the trades when they reached 50% of max profit, 25% of max profit or just letting the trade run to expiration.
When comparing results, closing out trades at 25% max profit yielded a 95% success rate. Trades managed at 50% were successful 90% of the time while trades held until expiration were successful 82% of the time. 82% is nothing to ignore but it is not 90% or 95%. In fact, the success rates on trades closed at 25% and 50% were so close, it’s hard to decide which management strategy is best.
When we manage trades at 50%, our daily P/L is around 77% greater than if we manage at 25% of max profit. In terms of time spent in a trade, to manage at 50% usually meant being in trades for 23.5 days versus just 13.5 days when managing at 25%.
When it comes to managing strangles, managing at either 25% or 50% should yield high rates of success. As tastylivers, we want more than just high rates of success - we also want to maximize our profits. By staying in a trade for just 10 additional days, we can significantly increase our daily P/L without giving up much in terms of overall percentages of being profitable.
Josh Fabian has been trading futures and derivatives for more than 25 years.
For more on this topic see:
Options Jive | Why Manage at 50%, Not 25% for Short Strangles: September 13, 2016
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2025 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.