Options Jive

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Strategy Comparison: Short Premium

Options Jive

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

The recent increase in Implied Volatility (IV) led us to think about different short premium strategies. Is there an advantage in using different strategies when it comes to premium decay? Should we use multiple strategies and will this help make our portfolio less correlated? How do these different strategies perform?

A table comparing the Buying Power Reduction (BPR) of a short at-the-money (ATM) Straddle, a 30 Delta Strangle and a 16 Delta (1 Standard Deviation (SD)) Strangle in IWM (Russell 2000 ETF) with 37 Days To Expiration (DTE) was displayed. These were chosen to simulate “worst case” losses.

A table comparing the potential profit, profit when managed, BPR and risk-reward on an IWM Straddle (managed at 25% of max profit), an IWM 30 Delta Strangle (managed at 50%) and an IWM 16 Delta Strangle (managed at 50%) was displayed. The table showed that the risk-reward was 4:1 on the Straddle, 7:1 on the 30 Delta Strangle and 12:1 on the 1 SD Strangle. A risk profile graph of the breakeven prices on the three strategies mentioned was displayed. The graph showed that the breakevens widen out as traders move from the Straddles to the Strangles.

A final table comparing the win rate, maximum profit, 75th percentile P/L, median P/L, 25th percentile P/L minimum P/L (largest loss) and Standard Deviation of Risk on the three strategies was displayed. The table showed that if you take more risk you make more money and if you take less risk you have a higher Probability Of Profit (POP).

For more information on Strategy Diversification see:

Watch this segment of Options Jive with Tom Sosnoff and Tony Battista for the key takeaways and a better understanding of how incorporating different strategies in your short premium portfolio can improve your chances of success.