Market Measures

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Duration and Volatility

Market Measures

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The closer we hold a trade to the expiration date, the more likely we are to experience delta expansion and gamma risk. Thus, one of the core management approaches we apply is managing early. When we sell a strangle with 45 days to expiration, we manage that strangle after 21 days. What if we sell strangles with 21 days and hold them to expiration? This would result in the same holding duration, is there any difference in performance?

The Study:
  • SPY
  • 2005 – 2018
  • 16 Delta Strangles
  • Compared two Strategies:
    • Selling 21 DTE, Holding to Expiration
    • Selling 45 DTE, Managing at 21 DTE
  • Both Strategies have the Same Duration
Results:

Comparing these two strategies, we see that selling at 21 days and holding to expiration results in a lower average P/L and a greater largest loss when compared to selling at 45 days and managing at 21 days. Additionally, when we simulate the long-term portfolio performance, the later expiration cycle results in significantly lower cumulative returns. Trading closer to the expiration incurs much greater risk with much lower monthly returns.

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