Market Measures

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Recovering From Losses

Market Measures

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One benefit of short premium strategies, including strangles, is their high probability of profit. However, a potential downside of the strategy is that the loss amounts are often greater than the winning amounts.

In this piece, the Research Team explores losing trades by quantifying loss amounts with a loss to premium ratio and measures how long it would take to bounce back from large strangle losses.

The Study:
  • SPY
  • 1 Standard Deviation Strangles
  • 2005 – 2018
  • 45 Days to Expiration
  • Held to Expiration
  • Losing Trades Only
  • Recorded the Loss to Premium Ratio
Results:

For losing Strangles, half of the occurrences have a loss less than or equal to the premium received. When looking at the largest losses which occurred in 2008, 2011, and 2018 we see that it would take 1.8 years, 1.3 years, and 1 year respectively to recover from these large losses if trading strangles in 45-day cycles and holding to expiration.

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