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The Risk of a Fat Tail

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.

Managing early can reduces extreme occurrences and limits the tail risk, which is one of the reasons we prefer not to hold our trades to expiration. Today's study helps to demonstrate why.

According to our study in 45 DTE 16 delta strangles on SPY, although the P/L distribution when we are holding to expiration is more positive than managing early at 21 DTE, it has much heavier left tails, which represents significantly more negative extreme occurrences. And we can see that managing early at 21 DTE can reduce 67% of the extreme negative occurrences and increase our winning chances over the long term.

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