Breaking down a multi leg strategy like a strangle we see that it’s really just a combination of a put and a call option. When used together, the strategy bears lower directional risk than the individual legs. This led us to ask, how do the short put and call perform independently?The Study:
- 2005 – 2018
- 45 Days to Expiration
- 16 Delta Put, 16 Delta Call, 16 Delta Strangle
- Held to Expiration
- Managed early at 21 Days to Expiration
Since the last decade has been a strong bull market, the naked put had the highest success rate and contributed to the majority of the P&L in the strangles. Somewhat surprisingly, the naked call also had a very high win rate even when being constantly tested. When looking at the long-term performance, we see that neutral strategies with their lower directional risk have much smoother P&L and lower volatility. Additionally, incorporating a management component such as managing at 21 days further improves the overall performance for all three strategies.