Outlier moves cannot be accounted for in our trading since they can happen at any time, but what happens if we sold strangles a day before a move greater than 5% to the up or downside? How would our ending P/L and risk look like?Study
- 45 DTE
- 2005 through 2018 (14 years)
- Sold 16∆ strangles the day before the outlier move
- 21 occurrences over the past 14 years
- Managed at 21 DTE vs holding to expiration
- Recorded average P/L and volatility of ending P/L
We find that we actually get a much higher daily P/L than the long-run average in all occurrences. This can be attributed to the higher VIX levels seen when these outlier moves occurred. Even though the directional movements were huge, we were compensated for it most of the time with a higher premium.