The so-called experts tout passive investing. They claim that a buy-and-hold approach of a broad based index, such as the S&P 500, will outperform active investing. We believe you should take control and can outperform that passive strategy. We are convinced that astrategy such as shorting 1 can outperform it. The Market Measures from September 26, 2016: tested our concept of short Strangles and (if possible) versus buy-and-hold. The tastytrade way won. The Market Measures from October 3, 2016: tested our concept of closing a trade early, specifically at 21 and the tastytrade way won again. Now in this third part we test our winning ways against each other and look for a way to improve them. Which one of these two is better?
We constructed a portfolio with $1 million of initial capital. Our study was then conducted in the SPY (S&P 500 ETF) using from 2005 to March 2016. We chose the the optioncycle closest to 45 DTE and sold 1 SD Strangles, in a regular account, and a new position only after closing the old one. We then compared strategies of closing the positions 21 DTE before expiration by allocating 10%, 15%, 20%, 25% and 30% of the capital or managing winners at 50% of max profit if possible using the same capital allocation levels.
An 11 year graph of the results showed that on average, the long-term performances of these two strategies were very close. We noticed that managing winners performed better in a bull market but had greater tail risk exposure due toand that managing earlier largely reduced Gamma risk but resulted in a . We ran another study combining the two approaches using a 25% capital allocation. A results graph showed that the combined strategy of managing winners plus managing early greatly improved the long-term performance and yielded 100% higher profits than a buy-and-hold strategy (with SPY used for the index). Additionally, we experienced a third less risk as measured by . A final results graph showed that by using the combined strategy a trader would only need to allocate 16% of available capital to match a buy-and-hold strategy.
For more information on related subjects see:
Market Measures from June 19, 2015:
Options Jive from October 7, 2016:
Watch this segment of Market Measures withand for the valuable takeaways and the compelling results of our final study on Portfolio Allocation for short Strangles, which shows how a combination of two strategies, can greatly improve performance as well as lower your portfolio volatility.