A "virtue" is described as a "behavior showing high moral standards." According to that definition, patience in everyday life is without question a virtue.

And according to new tastytrade research presented on Options Jive, patience may also be one of the most important tools in a trader's utility belt.

While we strive to win the highest percentage of trades possible, the reality is that many of them get tested. Responding appropriately to that type of adversity isn't always easy - emotion can often get the best of better judgement.

That's why this particular episode of Option's Jive falls in the category of "must see TV" - it may help you tweak your approach going forward in a way that allows you to maximize your potential returns.

When a trade goes against us, we have three choices:

  • Close the position and take the loss

  • Keep the position and hold it

  • Roll the position

Today, we're breaking down historical data that helps shed light on the first two choices listed above - Close It or Keep It.

In order to gather the data necessary for this analysis, the Options Jive team ran a study incorporating the following parameters: sold 16 delta strangles in the SPY with 45 days-to-expiration (DTE) from 2005 to present.

The goal of the analysis was to isolate the losing trades, and filter the data for any discernible trends. The slide below highlights how losing trades tend to cluster toward the early part of the trade cycle:

As you can see from the above, the data showed that as time passes, trade performance tends to improve.

Further analysis of the data showed that after breaching a loss, 96% of the losing trades in the study saw profits on average in the aftermath. Furthermore, the study showed that it takes about a week for a trade to correct itself (on average).

Most importantly, the data showed that by holding all losing trades through expiration, the average P/L of combined trades was positive. Now, let’s take the analysis one step further.

In the next phase of the study, the team separated the trades into categories based on the size of loss. The metric used for this categorization was how the loss compared to the initial premium sold.

For example, if a trader received $200 in premium, then a 1x loss would equate to approximately $200. A 2x loss would therefore equate to roughly $400 ($200 x 2 = $400), and so on.

While one might instinctively think that cutting off losers as they get larger may be prudent (i.e. Close It), the data suggests that holding these types of trades may allow for mean reversion to help correct the problem.

As you can see from the summary statistics below, nearly 50% of the maximum loss incurred during the worst point of the trade management cycle was recouped (on average) when holding the trade through expiration.

Another key data point helps reinforce the virtue of patience when trading volatility.

Looking at the complete study, tastytrade observed that 79% of all trades experienced at least one losing day. As we already know, short premium strategies generally produce a high win rate (on average).

Combining these two assumptions means that traders adopting the short premium strategic approach need to understand that many of their trades may be tested along the way, but that they’ll ultimately produce a positive return over time (assuming the strategy is applied consistently).

If selling premium required zero skill or experience, every market participant would do so.

The key to this approach is recognizing that the statistics rely on instances (volume) and timeframe. The data presented in this episode suggests that by cutting off winners, volatility traders are simultaneously cutting into net return.

We hope you’ll take the time to review the full episode of Options Jive focusing on patience in short premium strategies when your schedule allows.

We welcome any comments and questions related to your own experience and hope you’ll leave a message in the space below, or reach out directly at support@tastytrade.com.

Thanks for reading!


Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.