Market Measures

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Redeploying Capital

Market Measures

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It has been shown several times that managing a winner maximizes P/L per day, but optimizing this metric relies on capital being constantly deployed. In today’s Market Measure, the Research Team seeks to answer: “What happens to portfolio performance if the capital returned is not immediately redeployed?” and “How does that compare to holding the trade to expiration?”

The study today presents the case to always remain active, even if opportunity isn’t abundant. The parameters of the study use the underlying SPY, from 2005-present (2,800 occurrences), selling the ATM Put everyday, at 45 DTE. The study compares full data set and cumulative results for:

  • Managing at 50%, then immediately placed another trade
  • Managing at 50% and waited until expiration to place the next trade (cash on sidelines)
  • Holding to expiration

Managing winners without immediate redeployment greatly underperformed holding to expiration.

Additionally, the Research Team discovered that two management styles earned the same average P/L per trade (by definition), but on average, instantly redeploying capital achieved that same P/L in half the time. If a trader didn’t redeploy the capital, it was better to hold the original position to expiration.

In conclusion, when managing winners, it’s a) prudent to redeploy capital, b) be careful to not wait around for certain opportunities (like high IVR) if the portfolio is in cash, and finally, c) it is important to have multiple positions on at one time so your portfolio is not entirely in cash.

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