Market Measures

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Why and Why Not 2 SD Strangles

Market Measures

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When selling strangles, traders have several choices when deciding their short strikes. One popular choice is the 16 Delta put and call because this represents a one standard deviation move. What happens if we sell strangles at the two standard deviation mark?

The Study:
  • SPY
  • 2005 – 2018
  • 45 Days to Expiration
  • Held to Expiration
  • Compared:
    • 1 Standard Deviation Strangles (16 Deltas on each side)
    • 2 Standard Deviation Strangles (2.5 Deltas on each side)
Results:

As expected, the further away strangle has a much higher win rate. The win rate for two standard deviation strangles is roughly 98% while for one standard deviation strangles the win rate is roughly 82%. However, with this higher win rate comes a much lower premium, average P&L, and daily return on capital. Extending this testing to the long term performance we observe that the one standard deviation strangle has a much greater cumulative portfolio return than the two standard deviation strangle.

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