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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

      Index 2 Standard Deviation Strangles

      Jan 4, 2017

      One of tastylive's top ten Pillars of trading emphasizes Implied Volatility’s overstatement relative to 1 SD moves and taking advantage of the historical relationship by selling 1 SD Strangles, but is it the same relationship in 2 SD Strangles? Do the mechanics apply for ETFs as well as cash-settled indices?

      1SD vs 2SD Strangles

      Using SPY, IWM, SPX, and RUT from 2005 to present, the Research Team sold the 1 Standard Deviation Strangle (16 Delta) in SPY and IWM, and sold the 2 SD Strangle (or 2.5 Delta) in SPX and RUT with 45 days to expiration. All trades were managed at 50% of max profit if possible.

      The number of trades with a winning percentage in SPX and RUT (as well as the average p/l for each) trade was high, but the few losses that occurred were large, which traders in smaller accounts should be aware of.

      2SD Moves & High SKEW

      With 2 SD options, the high SKEW readings imply greater tail risk due to the options being bid up. Still, high SKEW levels also result in more consistent profits (see slides for more details).

      Tom and Tony concluded that although they like 1 SD Strangles in underlyings like SPY, opportunities to trade 2 SD strangles in larger underlyings like SPX or RUT (though they are not a guaranteed "win") can be attractive. Ultimately, though, traders must remain cautious to the size of indices like SPX and RUT as the potential large losses they tend to witness when the market incurs large moves.

      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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