Market Measures

Monday – Friday | 9:00 – 9:20a CT

Why and Why Not 2 SD Strangles

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.

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)

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.

Market Measures More installments

See All »

Latest tastytrade Videos As of May 30

Most Shared From the last 30 days