This segment expands upon a previous segment testing the efficiency of using shorter dated far out of the money puts and calls to hedge short straddles. The studies reveal what happens when using slightly longer shorter term “protection” versus naked straddles and also tests using equal length protection.
The Market Measures segment on July 27, 2015, “Straddles | Short Term Protection, tested using “protection” from an outlier move on our standard 45 day short straddle. Out of the money calls and puts with 15-20 DTE were bought for 0.20 each. We took off both the short straddle and the protection at the front month expiration. This strategy was profitable but the results were mediocre when compared to holding a naked short straddle. Of special interest to IRA and tastyBites accounts, the short term protection did not provide margin relief.
Today we reveal the results of two studies testing different variations of the strategy. We sold a straddle and purchased calls and puts for partial protection (for 30 of the 45 days of the trade) and we sold a straddle and purchased calls and puts for full protection (for 45 of the 45 days of the trade)
A study was conducted from January 2013 to present using the first trading day of the month. The study used the S&P 500 (SPY), Gold (GLD), Mexico (EWW), Russell 2000 (IWM) and the Bond (TLT). We sold the at-the-money Straddle closest to 45 days and bought protection for 30 and 45 days by using the out-of-the-money (OTM) call and put each option were bought for a $0.20 debit.
A table was displayed of both the short straddles with short-term 30 days to expiration (DTE) protection and long-term 45 days to expiration (DTE) protection. These positions were managed at 25% of max profit as well as held to first expiration. The table showed the results of the percentage of winners, average P/L, max loss and P/L.
A second table was displayed of short straddles with long-term 45 days to expiration (DTE) protection as well as a short straddle with no protection. These positions were managed at 25% of max profit as well as held to first expiration. The table showed the results of the percentage of winners, average P/L, max loss and P/L.
Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista to learn the takeaways and the results of the studies to find out whether using “protection” on short straddles is beneficial to your trading.
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.