Market Measures

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Manage Earlier - Performance

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.

The Market Measures from January 26, 2016: "Managing Winners | Exiting Based On Duration" showed how exiting early was a better alternative than holding the trade to expiration. What was not examined is what the long term performance would be. So is exiting earlier superior over the long run and which time frame is the best?

Our original study was conducted in the SPY (S&P 500 ETF) from 2005 to present. We chose the options closest to 45 days to expiration (DTE). We sold the 1 Standard Deviation (SD) Strangles and compared closing the trade at one week, two weeks or three weeks before expiration. A table of the results showed that although holding through expiration yields a higher P/L per trade, managing positions earlier reduces the duration and increases the potential average P/L per day.

Today’s study had the same parameters and data set of the old study but after a trade was closed or expired then a new trade was opened. So for each of the four strategies, either holding to expiration or closing the trade earlier at one, two or three weeks before expiration, only one position was open at any one time. A graph of the cumulative profits showed that all three early choices outperformed holding to expiration. A table displayed the results for number of occurrences, average P/L per trade and win ratio in percentage terms. Managing one week early had the best P/L but managing 3 weeks early was close and avoided more Gamma risk.

Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the study results comparing exiting positions early to holding to expiration.

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