Market Measures

Cross-Products Strangles

| Mar 3, 2016
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    Market Measures

    Cross-Products Strangles

    Mar 3, 2016

    We’ve discussed the strategy of Pairs Trading using options several times in recent months.

    Today, however, we tested the success of pairs trading SPY & IWM compared to selling strangles in the underlyings individually.

    The 3 month and 6 month correlation between SPY (S&P 500 ETF) and IWM (Russell 2000 ETF) indicates these two underlyings are highly correlated and very liquid.

    The study was conducted using SPY and IWM from 2005 to present. Using short options closest to 45 days to expiration (DTE) we sold the 2 week outperformer (by shorting a call) and bought the underperformer (by shorting a put). We compared this strategy to Strangles in a single stock and managed both at 50% of max profit versus holding the trades to expiration.

    Typically, selling premium when there is a higher implied volatility (IV) and implied volatility rank is most beneficial. For the following study, trades were also filtered for when SPY IV Rank was over 35%.

    So how do cross product strangles compare to short strangles in individual ETFs? And how does implied volatility and IVR influence the win rate and P/L of this study? Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the valuable takeaways.

    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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