Market Measures

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Credit as a Risk Measure

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.

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 have Straddles and Strangles reached 1 or 2 times the initial credit received? How often have they all done so together within the same cycle?

Study:

  • Examined SPY, TLT, and GLD strangles and straddles closest to 45 DTE.
  • Managed 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.

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