The Market Measures from September 20, 2016,showed very favorable results for a strategy of long stock and short comprised of a short 30 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 optionscycle closest to 45 . We simulated selling 100 shares of SPY stock, selling one 30 Delta Call and one 30 Delta Put Put. We then (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, 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 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 .
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:
Closing the Gap from December 22, 2015:
Strategies For Your IRA from December 23rd, 2015:
Closing the Gap from May 16, 2016:
Watch this fascinating segment of Market Measures withand for the valuable takeaways and the detailed results of our study on Covered Strangles with short stock.