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Options JiveCost of Buying Wings | Oct 10, 2016
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    Options JiveCost of Buying WingsOct 10, 2016

    A Strangle is considered an undefined risk trade and in theory has unlimited risk. By purchasing a Put wing and a Call wing a trader can define the risk (the width of the strike) and transform a Strangle into an Iron Condor. The risks are now defined but what about the costs? How much do the added costs of the Iron Condor impact performance?

    Our study was conducted in the SPY (S&P 500 ETF) using data from 2005 to the present. We chose the option expiration cycle closest to 45 days to expiration (DTE) and compared short Strangles to short Strangles with varying width wings of $2, $3, $5 and $10 wide.

    A table of the results was displayed. The table included the average P/L, Probability of Profit and the max loss. The table showed that by widening the strikes you increased P/L and POP. A second table displayed the results when the Strangles were managed at 50% of max profit (if possible). The table included the average P/L, Probability of Profit (POP) and the trade duration. The table showed the tighter (greater) the protection, the longer the average time required to reach 50% of max profit. The widest strikes had the highest average P/L and POP. Tom noted, “The takeaway from here is the more risk you can afford to take, the better the results are.”

    For more information on the cost of Buying Wings see:

    Watch this segment of Option Jive with Tom Sosnoff and Tony Battista for the important takeaways and the results of our study on the real cost of buying protective wings for a short Strangle.

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