Exiting straddles

Slides

From TastyTrade 6/9 Market Measures

My takeaways are that

Here are the notes from Tastytrade 

Source: Tastytrade.com

 

Exiting Straddles

We normally discuss what to do with our winners when trading straddles. Today, Tom Sosnoff and Tony Battista examine possible trade exits when the position goes against us. Tom and Tony said that they have received many emails on the subject of closing straddles. Tom said, "We understand the managing winners side, now were going to discuss the managing losers side. When you sell a straddle, one side is going to be in the money right up front."

How much is our win rate affected when applying an exit rule for naked options?

How much room should we allow a losing trade to go against us?

Is there an optimal exit point for exiting a loser?

Selling straddles has benefits for the short volatility trader:

1) Positive Theta

2) Short Vega

3) Large Credit = Higher Potential Profit

4) Flexibility of Management

5) Less Commissions

But these benefits aren’t free. Here are the primary cons to selling straddles:

1) Higher BPR = Lower ROC

2) High Vega Risk

3) Possibility of large losses

The Study:

SPY, GLD, TLT, EWW, IWM, 2009 - Present

Sold ATM Straddle, 1st of the month Closest to 45 DTE

Exited trades at:

Expiration or Loss equal to 0.25x, 0.50x, 0.75x, 1x, 1.25x, 1.50x, or 2x of the credit received

Of the 378 occurrences, 186 (49% of the trades) never got to a 25% credit loss. Tom was amazed at this high percentage. Of those that did, how many reached or exceeded each of the pre-determined exit points?

Takeaways:

As we incrementally increased our loss limit, we saw a +28% win rate and +97% more profits when holding to expiration compared to managing at a .25x loss

The highest win and P/L was seen by holding to expiration, however this was also accompanied by the largest loss