Our studies have taught us that when we trade Strangles we should manage our winners at 50% of max profit if possible. Should one of the strikes we are short be tested before we are able to manage the trade we will roll the untested side towards the current price and extend duration. A Straddle is obviously different. One side of the Straddle will always be in-the-money (ITM). How do we trade Strangles differently? Should we perhaps look at breakeven prices?
Our study was conducted in the IWM (Russell 2000 ETF) and SPY (S&P 500 ETF) using data from from 2005 to the present. We simulated selling the at-the money Straddle. We managed winners at 25% of max profit (if possible) or held to expiration. We then noted when the trades touched the upside breakeven and/or the downside breakeven.
A table of the results showed the percentage in which IWM or SPY touched either the downside breakeven, upside breakeven, either breakeven or both breakevens of the short Straddles. The results of IWM were similar to that of SPY. Two additional tables separately compared the IWM and SPY Straddles. The table included the credit received, success rate, average P/L, average win, and average loss. The table showed that the trades not managed before touching a breakeven were net losing trades. This again proves the importance of managing winners to reduce our risk. A suggestion on how to react to this situation was revealed in the takeaways.
For more information on Short Straddles see:
Market Measures from June 19, 2015: "Straddles | Managing Winners and Losers"
Market Measures from June 6, 2016: "Straddles: No Pain, No Gain"
Market Measures from July 27, 2016: "Product Indifference: Analyzing Straddles"
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the results of our study on the probability of touching breakeven levels on a short Straddle.
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