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Why 25% of Straddles, Not 50%? - Jan 18, 2017 | Options Jive
Despite the fact that option premium decays faster as we near expiration, we still prefer to close our Straddle spreads when they've reached 25% of maximum profit. Why? The Research Team, Tom & Tony explain in today's Options Jive.
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      Options Jive

      Why 25% of Straddles, Not 50%?

      | Jan 18, 2017
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      Options Jive

      Why 25% of Straddles, Not 50%?

      Jan 18, 2017

      Despite the fact that option premium decays faster as we near expiration, we still prefer to close our Straddle spreads when they’ve reached 25% of maximum profit. Why? The Research Team, Tom & Tony explain in today’s Options Jive.

      Using SPY (S&P 500 ETF) from 2005 to present, our team sold the ATM Straddle every day the market was open and managed positions at:

      • 25% if possible or held through expiration
      • 50% if possible or held through expiration

      The Results

      Despite the observation that managing winners at 50% yielded a higher average P/L than at 25%, the daily P/Ls decline. Also, based on average P/L and credit received, holding on to winning trades to increase profits saw minimal payout.

      Why Manage Sooner?

      When selling options, we aim to take winning trades off the table in order to avoid gamma risk. Gamma is the rate at which delta can change, and as expiration nears, premium-selling positions can experience large swings in daily gains and losses, further encouraging traders to take profits off the table when they have them.

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