Our favorite Delta Neutral strategy is the 1 Standard Deviation (SD) Strangle in which we are selling the Put and Call closest to a 16 Delta. The idea of a slight directional bias when selling premium was recently discussed at tastylive and we decided to run a study. Is a bullish, bearish or neutral bias the best approach to take when shorting Strangles?
Our study was conducted in the SPY (S&P 500 ETF) using data from 2005 to the present. We shorted Strangles and managed them at 50% of max profit if possible. We compared our regular 1 SD Strangles to ones in which we substituted the 30 Delta Put creating positive Deltas and ones in which we substituted the 30 Delta Call creating negative Deltas. We then filtered the results for high and low Implied Volatility Rank (IVR) environments.
A table displayed the results. The table included the win rate, largest win,top 25% P/L, median P/L, bottom 25% P/L and largest loss. While we saw a higher P/Ls across the board for moving the call or put closer in, the win rates and large losses do get worse. Two separate tables displayed the results for high IVR (above 50) and low IVR (below 20). As expected, carrying positive deltas helped when IVR was high since the market tends to bounce a little after a selloff, but it didn’t help the large losses. Holding positive deltas in low IVR performed well due to positive drift, but most of the results look similar. A final table displayed the results for the 3 different Strangle types but with the neutral Strangle now comprised of a 30 Delta Call and a 30 Delta Put. The 30/30 neutral Strangle still had the best metrics across the board.
For more information on Directional Trades see:
Market Measures from October 28,2015: "Understanding Vega | Directional Trades"
Market Measures from January 21, 2016: "Directional Efficiency"
Options Jive from February 16, 2016: "Options Risks | Direction (Delta)"
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the results of our detailed study comparing Neutral, Positive Delta and Negative Delta short Strangles in high, low and all IVR environments.
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.