It is important for a trader to know what to expect in a premium selling strategy so this segment graphically displays the P/L results from studies done on short selling strangles in the SPY. Watching this will help a trader remain calm when faced with adversity during the trade.
Previous tastylive studies have shown that selling premium over time in the S&P 500 has been profitable. When Implied Volatility (IV) is high, this is especially true. Being short premium into large directional moves or large volatility expansions though will leave a trader with unrealized losses on those positions. A trader then may want to exit the trade because of that uncomfortable situation.
In order to put context around how often we expect to see a loss on a trade before a profit, a study was conducted from 2010 to present. A short Strangle in the SPY was sold every 5 days using the expiring month closest to 45 DTE and the 0.15 and 0.25 delta strikes were sold. A table showed the results for the strangle with a .15 delta each side and a .25 delta each side. The results included the percentage of trades profitable at expiration, average P/L at expiration, if the strangle had a loss at any time before expiration, whether the strangle could have been managed at 50% of max profit at any time, if the strangle had a loss greater than 1x max profit and whether a loss greater than 1x eventually became profitable.
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the results of the studies and the important graphs which can prepare a trader for what to expect in a short premium selling strategy.
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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