Today, on this segment of "Market Measures", Tom Sosnoff and Tony Battista examine the topic of managing straddle winners and losers.
The strategic management of a trade is critical. Tom and Tony, on a previous segment of Market Measures ("Straddles|Managing Winners" 05/14/2015), showed that it is best to manage winning straddles at 25% of max profit. Additionally, Tastytrade found that a losing straddle trade should be closed when the loss is at least greater than the credit collected for selling the straddle. This should help to avoid catastrophic losses. This segment examines those two management "rules" together to see if an equilibrium can be found to maximize profits and probabilities.
The study examined five ETFs and used the first trading day of the month from January 2009 to the present. Tastytrade's research team compared closing at 25% of max profit or at expiration and different loss amounts. A table is displayed which shows what happens at 25% max profit (MP) (or holding through expiration), 25% MP or 1x max loss (ML), 25% MP or 1.25x ML, 25% MP or 1.5x ML and 25% MP or 2x ML. The win rate, largest loss, average days held, average P/L per day and total P/L are listed. A clear winning choice is apparent. It has the greatest profits and is near the smallest "largest loss".
Watch this episode of "Market Measures" with Tom Sosnoff and Tony Battista for the clearly best strategy to use in managing short straddle winners and losers.