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Managing Strangles: 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.

We often emphasize managing strangles at 50% of max profit. This improves their success rate well above the probabilities implied by options pricing.

In today's segment, our Research Team tested to see if 50% of the initial credit received is a favorable profit target for managing 1 SD (standard deviation) strangles. Additionally, is it more efficient to reduce the time in the trade by managing earlier or staying in the trade longer to hopefully increase P/L?

Using SPY(the S&P 500 ETF) from 2005 to present, we sold 1SD Strangles in option cycles closest to 45 Days to Expiration. From there, we compared the results of managing at the following percentages of maximum profit:

  • 12.5%
  • 25%
  • 37.5%
  • 50%
  • 62.5%
  • 75%
  • 87.5%
  • 100% (expiration)

Similar to Straddles, our results indicated that higher profit targets tend to experience diminishing win rates. Profit/Loss per day, however, clearly peaked at the 50% management level.

Watch this Market Measures on Strangle Management for the valuable takeaways on ideal profit targets when trading undefined risk strategies.

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