Market Measures

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Managing Losses in Strangles

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.

All of our strategies and mechanics here at tastytrade are contingent on the trader being active in his or her account on a daily basis. So if we often talk about the benefits of managing profits in our options trades, then could there be something to managing losses?

The Research Team recently put out a study in Market Measures concerning managing losses in Iron Condors, which did not result in a profitable strategy. However, naked options strategies like the Strangle might benefit from having losses managed due to their ability to exhibit large losses.

The Study
  • Sold 1 Standard Deviation (16 Delta) Strangle
  • Compared management techniques
  • 50% or expiration
  • 50% or 100% loss or expiration
  • 50% or 200% loss or expiration
  • 50% or 300% loss or expiration
  • S&P 500 (SPY), 2005 to present
The Results

We found that managing losses as a percentage of the credit received did indeed reduce average losses, but it was not by enough to make up for the rise in the number of losses taken. The success rate was reduced when losses were managed, and this reduced the average Profit/Loss.

Check out the segment above to see Tom and Tony go through the numbers and give some detailed examples.

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