Hey everybody, BEEF here from the tastylive Research Team.
Among all the strategies we use to sell options, straddles typically have the most premium for us to collect. Because of this, we wanted to look into what represents a reasonable level at which to manage our winners. Generally with short premium trades, we look to manage around 50% of max potential profit…but we wondered if that holds true for the straddle as well?
Then it was our favorite time: time for a study! We looked at five underlyings from January 2009 to present, with a total of 375 occurrences. On the first trading day of the month we sold the ATM Straddle closest to 45 DTE. We then looked at three different management styles:
Holding to expiration, managing at 25% of max profit, and managing at 50% of max profit.
We found a significant improvement in both P/L (up 11%) and percentage of winners (up 16%) when we managed at 25% instead of 50%. Also the 25% strategy on average saw a 40% reduction of time in trade. This is a pretty powerful takeaway that supports a faster management style with straddles than with other short premium trades.
If you want more detail on this study, check out the full study here! And there’s tons more great research in the show archives.
OK, I’m Mike Hart. For the rest of the research team, thanks for watching Market Measures Notebook!
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.