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Mega Strangle Study

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.

With short strangles being a very common strategy we like to use at tastytrade, we decided to conduct a mega study investigating the strategy's performance in different volatility environments. For the study, we went back approximately 5 years and sold a 1 standard deviation strangle with 45 days-to-expiration in 5 different underlyings on the first trading day of every month. This gave us a total of 314 occurrences.

After placing the strangles, we tested managing the strangles at 50% of max profit, as well as holding them until expiration. Finally, to analyze the volatility effect of the strategy's performance, we compared the results of strangles entered in low IV (IV rank under 50) to the strangles entered in high IV (IV rank greater than or equal to 50).

Over all of the occurrences, managing the strangles at 50% and holding to expiration proved to be successful, returning $7,209 and $12,297 respectively. We also had a much higher win percentage than the option probabilities initially suggested. Selling a 1 standard deviation strangle should be profitable approximately 68% of the time over many occurrences. In this study, managing every trade at 50% of max profit had a 90% win rate, while holding until expiration had an 82% win rate, both being much higher than the expected 68% win rate.

Of the 314 occurrences, 73 of them were entered when IV rank was high (50 or above). Interestingly, our total P/L from these occurrences was $3,710 when managing at 50% of max profit, and $6,535 when holding until expiration. This means that 50% of the profits in the study were from the high IV trades (23% of the total occurrences). Additionally, the win percentages in high IV were 93% when managing at 50% of max profit, and 89% when holding until expiration. Again, these figures are much higher than the expected win rate of 68% on a 1 standard deviation strangle. Lastly, our largest loss in a single trade was $721 in the high IV occurrences, and $2,655 in the low IV occurrences.

In conclusion, the high IV entries proved to be the most capital-efficient in terms of overall P/L, win percentage, average P/L per day, and largest single loss. The low IV trades were still successful, but not as attractive as the high IV entries. Since high IV occurrences aren't nearly as common, we can still be active by mechanically selling strangles in low IV environments, we just have to lower our expectations for these trades.

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