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Market Measures

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Manage Losers?

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.

Anyone who has seen our research studies knows the value of managing winners. Our studies have also shown that managing losers along with managing winners is superior to holding to expiration but is that all or almost all from the benefits of managing winners? What is the real advantage, if any, in managing losers?

Our first study was conducted in the SPY (S&P 500 ETF) using data from 2005 to the present. We studied average performance. Every business day for a total of around 2900 occurrences we sold the 1 Standard Deviation (SD) Strangles using the options expiration cycle closest to 45 days to expiration (DTE). We then compared managing losers at 1x, 2x, 3x, 4x, 5x the point when possible or holding to expiration. A table displayed the results. The table included the average P/L, win ratio and biggest loss. The table showed that although managing losers reduces the max loss, it reduces the average P/L and win ratio at the same time.

Our second study was conducted using the same data but this time we were studying cumulative performance. We only held one position at a time and opened a new position only after closing the old one. We then compared managing losers at 1x, 2x, 3x, 4x, 5x point when possible or holding the trade to expiration. Managing losers at all levels still couldn’t outperform holding to expiration over the long-term. A second results table of the cumulative performance of managing losers of short 1 SD Strangles showed that it had very similar results with the average performance study. Tom made the point that, “You don't focus on things you can't control… ...fight the battles you think you can win.”

For more information on Managing Losers see:

Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and in depth study results on whether there is any advantage in managing losers.

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