Market Measures

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Risk/Reward Across Deltas pt.2

Market Measures

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Yesterday, we found that the lower delta strangles paid more per unit of risk than the higher delta strangles.

Today, we are going to separate occurrences based on volatility, and see if the trend changes.

Study
  • SPY, 45 DTE, 2005-2018
    • 10, 16, 20, 30, 40, and 50∆ strangle (over 20,000 occurrences)
    • VIX < 10, VIX between 10 and 20, VIX > 20
  • Managed at expiration and 21 DTE
  • Recorded average P/L, and volatility of P/L of both strategies
Results

We find that for the most part, trading lower delta strangles outperforms when you take into account the amount of risk you take.

Higher IV scenarios provide better risk/return for all strangles.

Note: The only time trading higher delta strangles would yield better risk/return is if you hold trades to expiration in high IV environments (which we don’t do anymore). We much prefer to manage early.

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