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Market Measures

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Average Moves

Market Measures

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Some of the many ways that tastytrade has found the effectiveness of selling premium is through studies involving:

  • Implied volatility overstating realized volatility
  • Average P/L being positive over the last 14 years
  • Probability of profit being above 50%

Today we are going to discuss another reason of the effectiveness of premium selling: average movements vs average breakevens.

  • Sold 1 SD Strangles in SPY
  • 45 DTE, Since 2005
  • Held until expiration
  • Compared:
    • Average upside and downside breakeven range as % of underlying price
    • Average actual up and down move as % of underlying price

We find that average moves in the stock price understate average breakevens by multiple percentage points, meaning that on average, our strangles will most likely expire worthless over the past 14 years. However, this is not to say that there is inefficiency in the market, rather that strangle sellers have been right more times than wrong.

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