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Managing Straddles: Varying Profit Targets

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.

When we execute undefined risk strategies (such as a short Straddles) we advocate managing winners in order to reducts Gamma risk while taking profits off the table. We take our profits at a certain percentage of the maximum possible profit (what we received in premium). What percentage of maximum profit is the best for managing Straddles?

Using SPY (S&P 500 ETF) data from 2005 to the present, we sold Straddles in the option expiration cycle closest to 45 days to expiration (DTE). We then compared results for holding the trade to expiration or managing winners (if possible) at:

  • 12.5%
  • 25%
  • 37.5%
  • 50%
  • 62.5%
  • 75% or
  • 87.5% of maximum profit.

Ultimately, the win rate and P/L per day dipped considerably after the 25% management target, and while the results for the 12.5% target looked about the same as those of the 25% management level, traders must consider the average P/L per trade as well as their commission structure for total profit.

Additionally, the study revealed no advantage historically to managing at profit targets higher than 50%, and that the 25% target was the best as the P/L per day for that target was the highest and nearly double any management target past 50%.

Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and results from our study that reaffirm our previous conclusions on exiting winners early.

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