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Market Data provided by CME Group & powered by dxFeed Technology. Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Market Measures

Context Around 30 Delta

Nov 23, 2016

One of the reasons why we believe you can be successful selling premium is that the Implied Volatility (IV) of an option consistently overstates the expected move. We have seen this numerous times in our studies involving shorting a 1 Standard Deviation (SD) / 16 Delta Strangle. Is the same true for the ½ standard deviation / 30 Delta Strangle?

Our study was conducted in SPY, the S&P 500 ETF using data from 2005 to the present. We chose the option expiration cycle closest to 45 Days To Expiration (DTE). We sold the 30 Delta / ½ Standard Deviation Strangle and compared several theoretical values to the historical results we produced.

A price graph of the SPY was displayed with a tastylive added projection of the expected range. Our results revealed that since 2005 the the S&P 500 has stayed in its ½ SD move 50% of the time although it was expected to do so only 38% of the time. Profit loss charts were used to help explain the rest of our results. We found the 30 delta strangle to be profitable 70% of the time at expiration and 81% when managed at 50% of max profit. The theoretical expectation was to be profitable only 55% of the time. Even without managing we still achieved profitability as the options expired in-the-money (ITM) more than theory predicts. Options we shorted were outside the breakevens only 30% of the time at expiration. The theoretical probability of touch was also overstated for the 30 delta SPY options throughout the entire life of the options.

Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the results of our study comparing 30 Delta / ½ Standard Deviation Strangles to the expected theoretical results.

This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

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