When Options Strategies Fail: Lessons from Major Market Events

The magnitude of a market correction does not reliably predict options selling performance — the correlation between the size of the market’s decline and strangle results is weaker than expected
Traders should be extra cautious when implied volatility is low because markets offer limited premium while creating exposure to volatility expansion events.
Proper position sizing makes even challenging years manageable, as evidenced by 2025's high single loss ratio but low median loss ratio.

Options selling strategies are popular for their consistently high success rates, but when losses do occur, they can be substantial.

April's market pullback was one of the quickest movements in recent decades, providing an ideal case study for examining how volatility affects options positions over time. A comprehensive analysis of SPY 1SD strangles over two decades reveals surprising insights about how market corrections actually affect options positions.

The loss-to-credit ratio

To measure potential losses during market turmoil, researchers use the loss-to-credit ratio — dividing the actual loss by the initial premium collected and multiplying by 100:

For example, a $1,000 loss on a position that collected $500 in premium would yield a loss-to-credit ratio of 2.0.

Findings from 20 years of data

The study examined 45-day SPY 1SD strangles held through expiration without management across two decades.

Surprisingly, the median loss-to-credit ratio is just 1.2, indicating nearly half of all losing trades experience losses smaller than the original premium collected. However, when extreme market conditions align, losses can reach significant multiples. The highest recorded loss-to-credit ratio hit 27 during the 2020 volatility spike.

While this year's market movement produced notable strangle losses, both the frequency and magnitude remained below 2020 levels.

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To put current market conditions in perspective, the current SPY 45DTE 1SD Strangle collects $6.22 in premium with VIX at 17. Based on historical data, only 16% of 1SD Strangles lose money without management. That means only 8% (half of 16%) of all positions lose more than $622. Losses exceeding 3x the credit ($1,866) occur in under 4% of cases, making them extremely rare events.

Market correction comparison

Analysis of five major market correction years revealed counterintuitive patterns that challenge conventional wisdom about market declines and options performance.

Despite 2008 experiencing the largest market pullback (-48%), the largest strangle loss ratios were actually seen in 2020 (27x loss-to-credit ratio). Meanwhile, 2025 produced the second-highest single loss ratio (15x) but maintained a relatively low median ratio (1.5), demonstrating that even challenging years can be manageable with proper position sizing.

What drives large losses

Two factors consistently create the most challenging scenarios for premium sellers.

Speed proves more impactful than magnitude. Quick market movements are more damaging than large but gradual declines. Rapid price changes leave little time for position adjustments, explaining why 2020 and 2025 generated notable losses despite moderate market declines compared to 2008.

Low volatility creates the worst conditions for premium sellers. Positions established during calm markets followed by sudden VIX spikes consistently produce the largest losses. When volatility is compressed, traders collect limited premium while remaining exposed to volatility expansion events. Both 2020 and 2025 exemplify this pattern. They’re periods of low implied volatility followed by rapid volatility expansion.

Kai Zeng, director of the research team and head of Chinese content at tastylive, has 20 years of experience in markets and derivatives trading. He cohosts several live shows, including From Theory to Practice and Building Blocks. @kai_zeng1

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When Options Strategies Fail: Lessons from Major Market Events