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What Else Ya Got

Strangles and NBA Free Throws

What Else Ya Got

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

Our style of trading and the strategies we use is based on data and statistics. You frequently will hear us mention things like Standard Deviation and that the Implied Volatility (IV) of an option usually overstates the expected move. You will also hear Tom and Tony frequently discussing sports. A statistic noted that an NBA player was more likely to make a free throw after he missed one. We wondered if this was actually true and if the same phenomenon was true in trading.

So does the same apply to a strategy of selling option premium, specifically, shorting Strangles? Are we more likely to see a losing trade after consecutive winners or vice versa? Our study was conducted in SPY (S&P 500 ETF) from 2005 to 2015. We sold a 1 Standard Deviation Strangle at the beginning of each month and held it to expiration. We then checked to see if we are more likely to have consecutive winners or losers.

A table of the study results showed that after both winning and losing trades we are more likely to have a profitable trade. A second table compared 2 consecutive winning or losing trades. The table showed that the third high probability trade was again more likely to be profitable for both losing and winning streaks. Tom and Tony made an important observation in the takeaways.

For more on related to this topic see:

Watch this segment of What Else Ya Got! with Tom Sosnoff and Tony Battista for the valuable takeaways, including what the study indicates we should do regarding adjusting our size after consecutive winners or losers.

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