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Covered Strangles: Short Stock

Market Measures

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

The Market Measures from September 20, 2016, "Covered Strangles: Long Stock" showed very favorable results for a strategy of long stock and short Strangles comprised of a short 30 Delta Call and a short 30 Delta Put. This gave us room to be wrong. The same should hold true for a short Strangle combined with a short stock position. How would that turn out?

Our study was conducted in the SPY using data from from 2005 to the present. We chose the options expiration cycle closest to 45 days to expiration (DTE). We simulated selling 100 shares of SPY stock, selling one 30 Delta Call and one 30 Delta Put Put. We then managed winners at 50% of max total profit (not the Strangle credit).

A table of the results was displayed. The table included the average max profit, average P/L, success rate and average days held. The table showed that this initial strategy did not work and had a negative average P/L. The next table showed the results of filtering for instances of high Implied Volatility Rank (IVR), specifically above 25 and above 50. The higher IV improved the average P/L, average max profit, success rate and lowered the average days held. Although we sold the stock into weakness, we were compensated with a higher Strangle credit and wider strikes (more protection). A third table filtered for instances in which IVR was below 10 and below 5. Since low Implied Volatility is synonymous with an up move in the market we were able to sell the short SPY stock into strength despite the lower credit for the Strangle. Surprisingly, IVR below 5 had the highest average P/L and success rate.

Tom summed things up by saying, “What this shows is that our whole methodology with respect to blind or aggressive contrarianism works! The opportunity in the markets is all related to fear and so when you get too much fear you have to sell premium. When you get too little fear, that’s when you can be directional.”

For more information on Covered Strangles see:

Watch this fascinating segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the detailed results of our study on Covered Strangles with short stock.

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