Market Measures

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Skewing Strangles

Market Measures

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Usually, our strategy defaults to using the same delta to start off delta neutral.

What if, instead, we start off premium neutral, i.e. same premium on both sides? How would that affect our risk/reward profile?

  • SPY, 45 DTE, 2005-2018
    • 16∆ strangle
    • Premium equal strangle (16∆P-22∆C)
  • Managed at expiration and 21 DTE
  • Recorded average P/L, and average standard deviation (risk) of P/L of both strategies

We find that, on average, the premium equal strangle underperforms the normal 16 delta strangle on both risk and reward metrics. The reason? Premium equal strangles are skewed to have negative deltas and therefore are tested on the call side more often than the 16 delta strangle.

The only time that the premium equal strangle would outperform is in periods of market downturns, where the profits from the short call can offset the loss of the short put.

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