When our account is ready to take on more risk, we can do so in two different ways:
- Increasing number of contracts
- Increasing deltas of current contract size
Which strategy performs better in terms of risk reward?Study
- SPY, 45 DTE options
- 2005 to present
- Compared increasing size with two 16 delta strangles versus a one 30 delta strangle
- All trades managed at 21 days to expiration
- Filtered results for Implied Volatility Rank below and above 30% to see effects of greater volatility
We find that the risk/reward increases proportionally for both strategies. In other words, the higher contact strategy has higher risk but higher average P/L than the higher delta strategy.
One key metric differentiates the two strategies: tail risk. The higher contract strategy is met with higher tail risk making the strategy much riskier for smaller accounts than simply increasing the delta.