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Portfolio Allocation for Strangles: Part 2

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.

Last week's Portfolio Allocation for Strangles found managing winners at 50% of max profit outperformed a buy-and-hold approach over the past 11 years. Today we ran a follow up portfolio study on managing positions 1 month before expiration. How does actively managing positions based on DTE compare?

Our study was conducted in the SPY (S&P 500 ETF) using data from 2005 to the present. We sold the 1 Standard Deviation (SD) strangle using the option expiration closest to 45 Days Until Expiration (DTE).

We then compared allocating 10%, 15%, 20%, 25%, 30% and 35% of the hypothetical 1 million portfolio toward the strategy. This was then compared to a baseline buy-and-hold strategy in the SPY (including the dividends).

The graph showed that allocating 25%+ of the portfolio beat the buy-and-hold. Additionally, it was done with less volatility of returns

For more information on Capital Allocation see: * Strategies For Your IRA from August 17, 2015: “Capital Allocation Awareness”

Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the detailed results of our study on the optimal percentage of capital to allocate to a short Strangle strategy.

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