This Market Measures explores the possibility of using a multiple of credit collected as a proxy for risk.
In theory, if a trader opts to manage losers, the portfolio’s max loss can be known by adding up all of the positions’ stop loss targets, which begs the questions:
How often haveand reached 1 or 2 times the initial credit received? How often have they all done so together within the same cycle?
- Examined SPY, TLT, and GLD strangles and straddles closest to 45 DTE.
- the strangles at 50% for a winner or 2x credit loss, straddles at 25% or 1x loss.
On average, about 12% of trades reached the stop loss. However, as a portfolio, it’s much more unusual for all positions to reach stop losses at the same time, as only about 2% of the time all 3 trades were stopped out within the same cycle.
The key takeaways:
- For undefined risk trades, using the credit collected is a reasonable expectation of risk.
- It is relatively rare for multiple positions in a portfolio to get stopped out within the same cycle.
- We can decrease this expectation even more by choosing stocks with low correlations with one another.