Comparing Neutral Options Strategies: Strangles and Straddles

blazing straddles yeah yeah they think they're fun even I think they're being now they're like writers who wrote this vennett out all right so blazing straddles when an underlying exhibits a high IV rank we're always looking to sell premium the reason we did this is because yesterday we did that we try to keep everything current so the topics were recovering yesterday we did that trade in ung so we figured hey let's we did a straddle in there we did a straddle which we don't usually do so we figured hey let's just write something up on this so he called it blazing straddles we have a wide range of defined and undefined risk traits as well as both directional non directional trades to choose from and these were some of the questions that case had at the end of the day when we were doing when I was doing my show with her so we said okay we're gonna we're gonna kind of give you some guidelines one neutral undefined risk strategy which we often utilize is a strangle a strangle and hide be ranked underline will often yield a favorable credit with probabilities that can enhance an overall portfolio now again we're gonna show you a marketplace right now which has been in extremely accommodating markets aren't always like this but Ivy's not always this cheap when selling a strangle we not only choose the short strikes with favorable probabilities but also our credit enhances our probability success the question we asked today is whether a tighter strategy a straddle can work in high IV rank underlyings with active management you know it's funny because throughout most of our career we never thought of spreads using names we just thought of positions now we're starting to use names so it's weird to Tony and myself to sit here and talk about straddles and strangles because it it never occurred to us that there was the difference between the strikes I'm just trying to I'm trying to put perspective around the way the difference in a little bit the way we think from from the way other people think about investing we never thought of something as hey this is called an axe like ass traveler strangle we always thought about something is hey I saw this I saw this also this I don't even care just doing the wings yeah whatever it is we'll just sell this and then maybe we'll fight you know hopefully find something to buy against it so to test this we conducted a study going back five years so I can again this is a very favorable five years so don't don't get hung up on like the results say this works 100% of the time this works 92% of time this was an incredibly favorable five years every time we sold high implied volatility in the last five years it works mm-hmm that's it I mean it's just it's it's hard to explain but it worked and part of the reason was we were in a period of just massive contracting volatility but you know you get to well we'll keep going through this you'll see but everything goes to parity eventually right we then entered into a one standard deviation strangle and at the money straddle with both as close to 45 days as possible we managed the positions of 25 50 and 75 percent we let them go to expiration here are the results and the reason we did this is because over the last couple of days doing the straddle in ung and doing a lot of strangles not necessarily ones around earnings but just in general just looking for positions with high B if we get any kind of a movement back towards high IV we're gonna have a very interesting a very interesting setup correct this is hard to read bet so you're going to have to if you have time look in the archives whatever it is but on the top row it strangles on the bottom it straddles and we want to show you was the pl difference between the one standard deviation strangle and the at the money straddle now I didn't at the money straddle yesterday in Netflix I didn't do it because I knew we were doing this study today maybe it influenced me and I didn't even realize it influenced me but the point in G the point and in ung is that that's why I thought this was so timely but if you look at the top row and you just look at at managing your winners one standard deviation strangle the pls were 443 8 8 13 8 62 and $1,100 if you go down to the straddle at the bottom for taking in more credits it's kind of a this is the the undefined way of looking at kind of a chicken iron Condor or something it's $1,200 $2,700 $3,500 and $3,500 and when you start to look at those numbers okay even though the number of winners was less even though the number the number of days was more and the average P&L per day was greater the straddle in this case at high in high IV rank made sense sure hence the discussion yesterday around Netflix and the reason for doing that Netflix straddle as opposed to something else like I said you don't know if you're gonna be a winner but you have to just you play the game I just play the game so did here and so we put these numbers up just and Ave a fairly broad overview these are remember this is e w W which is the Mexican ETF if I go to the next page this is G DX which is gold and if you look at the top row in this triangle 5:46 1100 1500 and 819 the first thing that jumps out at you which is a confirmation of everything we talked about and it's a great study by the way is that holding the expiration there's no advantage so managing your winners clearly the way to go and the strangle with a hundred percent success rate I mean you know yeah have you be brain dead not to notice that over the last five years this straddle down below blew it away in the short term with the 25 percent numbers but when you got into a more volatile product you know it obviously was much harder to manage so you didn't blow it away 50% 75% or expiration that's for sure so so so this was an example in gold we're putting on the strangle worked better than the ETF putting on the putting on the straddle again there's not a huge takeaway from this other than managing winners when you trade gold products the key sure as it was an e WW also and then finally here we get into IWM which is more which drives the lines kind of this of the stuff we do a little bit close drives closer to the lines but we do this strangle again delivering virtually a hundred percent profit using those big wide wings with a strong average P&L per day and a strong number of days held for 450 850 eleven twelve hundred and twelve hundred and if you look at the the straddle down below 1700 1,900 1,800 1,800 so again the takeaway from this it extremely powerful that the takeaway being that you have to manage your winners that's the first takeaway the tech the second takeaway is you got paid for taking more risk agreed so so because people all the time say why would I do this straddle which has a in in some cases let's just called a 55 or 60 percent chance of success as opposed to the strangle which had you know a 68 percent chance of success well the difference is you get paid a lot more so the difference is in IWM if you sold the straddle you made 1,700 bucks if you managed to 25% over 5 years as opposed to 469 and if you did it at 50% you may 19 hundred bucks but the point is if you meant something if you manage it on a if you managed to sell the 13 234 you're reusing the money all the time 2000 that's a strangle so the other take away with the strangle is that work faster so if you sell the straddle it takes more time to realize your money if you sell the strangle you get less you realize your money less time with a higher probability success you just make less money we're not so you get to reinvest that money in we're not suggesting that one is better than the other course not but at least when you're taking more risk you get paid more when it works and at least we take less risk you get paid less I mean isn't even me there's almost we've received probably a couple hundred emails requesting that we compare straddles to strangles and also that we we show in the process of that how Matt how many days you have to hold expiration advantage strangle how much money do you make advantage straddle maximizing your maximizing your profits by managing your winners both of them so again again you're going for more money you sell more stuff and you're you're going for a higher probability of success and a whole period you do the strangle and you can expect to hold for a much shorter period of time you want to hold for a little bit longer period of time you want to make a lot more money you sell the straddle the results are the numbers the numbers as far as the as far as the percentage of winners are staggering in periods of high volatility anybody that tells you this is a game of market direction based on what you think is gonna happen next they just they don't they don't get on any level any level that's correct and they're old I mean being they're old thinking all the thinking is alt yes yeah no question hey just before we take a break SNPs this is a really good study it's all archived this should clean up so much stuff over time

Channel: tastytrade

Views: 12,841

Rating: 4.8766518 out of 5

Keywords: tastytrade, tastytrade.com, tasty trade, tastytrade network, tom sosnoff, tony battista, finance, options trading, how to trade options, trading options successfully, tastytrade options, financial investment, stock market, Get Tasted, market measures, strangles, straddles, option strategies, neutral options

Id: aEUeRDsuZow

Length: 9min 55sec (595 seconds)

Published: Thu Jan 23 2014