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Market Measures

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The Anatomy of a Strangle - Put and Call

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.

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:
  • SPY
  • 2005 – 2018
  • 45 Days to Expiration
  • Compared:
    • 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.

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