Our favorite strategy for selling premium is a short 1 Standard Deviation (SD) Strangle. The 1 Standard Deviation Strangle is comprised of a short 16 Delta Put and a short 16 Delta Call. We decided to compare Strangles using other Delta levels. Tom noted, “We wanted to see if the risk is truly symmetrical in this process or if there is an optimal strike to use?”
Our study was conducted in the SPY (S&P 500 ETF) using data from 2005 to the present (2800 occurrences). We chose the option expiration cycle closest to 45 days to expiration (DTE). We compared short Strangles with Deltas of 5, 10, 16 (1 SD), 30 and 50 (Straddle). We held all trades to expiration.
A table of the results showed that the higher the Delta the greater average P/L but the lower the win rate. The table highlighted the advantage of selling premium as the win rates were higher than expected. A graph of the cumulative performance of the tested Strangles using a 1 Lot was displayed. The graph showed that the higher the Delta, the higher the profit but also the higher the Volatility of the trade. The lower Delta Strangles had lower profits but also a much lower Volatility of returns.
Tom added, “What's kept us in the game so long is staying small enough to hang around forever, because this is just a numbers game and you have to let the other side beat you.”
For more information on Varying Deltas see:
Market Measures from December 18, 2015: "Different Deltas, Different Risk/Reward"
Market Measures from March 14, 2016: "Strangles | Varying Duration"
Market Measures from July 14, 2016: "Short Puts: Expectations for Different Deltas"
Watch this segment of Market Measures with with Tom Sosnoff and Tony Battista for the valuable takeaways and the results of our study comparing Strangles at various Delta levels.
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