When we are selling naked options, we will often look to close our trades when they have reached 50% of max profit. However, it is important to note that more often than not, you will see a loss before you are able to manage your trade. By understanding this, you can have better expectations around the trades that you are placing.
Today, Tom Sosnoff and Tony Battista look at how often a Strangle will experience a loss before you are able to manage it at 50% of max profit. They find out this happens approximately 79% of the time. It is also interesting to note that if the loss was equal to the credit received (sold for $1, now trading for $2), there was still a 52% chance that the strangle would close for a profit. By understanding this, you are better able to manage your expectations of the trade and not get "scared" out early!
The guys then take this one step further and look to see how the VIX impacts the Strangles. They find out that a VIX above 20 increases your probability of managing at 50% of max profit to 90%. This further proves why we like to wait for periods of high Implied Volatility!
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