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Stop Losses in Spreads

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.

Some traders argue that managing losers for risk-defined strategies is necessary because it could prevent losing 100% of the trading capital. So, today we are going to compare the performances with and without managing losers in spreads.

Study
  • SPY, Closest to 45 DTE, 2005 to Present
  • Put spread with 30 delta short puts
  • Compared the width of the wings at:
    • 2, 3, 5, 10
  • Holding to Expiration
  • Managing losers at 2X of the max profits

We find that, on average, managing losers does not outperform holding to expiration. Additionally, if we trade a portfolio with one lot at a time, managing losers actually ends up underperforming holding to expiration.

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