How much buffer room can we expect from the movements of the stock over a 45 day period compared to our breakevens on a strangle? In other words, on average, how much wider are our breakevens than the actual movement of the stock?Study
- SPY, 45 DTE
- 16 delta puts and calls (strangles)
- Held the strangles to expiration
- Average upside and downside breakeven range as % of underlying price (expected moves)
- Average actual up and down move as % of underlying price
We find that the breakevens overstate actual movement by a significant margin. This is the same argument as the implied moves overstate realized (actual) movements.