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Credit as a Risk Measure

Market Measures

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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