How to Manage Straddle Options to Maximize Profits & Return

it's kind of a follow up to a bunch of other studies that we've recently done that we've gotten so much feedback on so I love to you know I think this this ties it this ties everything in there nicely so profit targets straddle and also today when case and I do where do I start we're going to talk about some of the defensive moves around straddles for smaller accounts because she has a couple of straddles on she's gonna kill me by the way because he wzz for a straddle on um but she's got a couple of positions on 257 what was it earlier three dollars okay so she's got a couple positions on small straddles and we're gonna talk about defending those straddles um so that's it and targets right I mean it basically comes okay so with recent study done on straddles and strangles we've shown a few advantages to selling this straddle despite slower decay during the initial phase of the trade since strangles are comprised of out-of-the-money strikes untested trades will expire leaving us for the hundred percent of max profit expiration since straddles always have intrinsic value making a hundred percent of the trade is completely unrealistic alright in fact we're only going for fifty percent anyway right for strangles we prefer the fifty percent level as a starting point for managing winners because straddles decay initially slower they rarely expire worthless we want to establish a realistic profit goal one of the biggest problems people have in finance it and you hear us is a million times it's a lack of know-how it's not a lack of wanting to be successful it's not a fear of success in fact I'll tell you since since the the first part of our career was on the professional side so we didn't know what was going through individual investors heads the second part of our career is on the retail side and so we kind of have a picture of how people think and even when they lose they don't lose their appetite for risk they just get frustrated by you know the the mechanisms the inner workings of how finance works and you should be frustrated sure because a lot of the stuff that we read about in a lot of the ways to try to get involved it's very frustrating you read an article on Finance this morning what are you gonna read Bill Gross leaves everybody for four dead or whatever it is um you know for dead the the somebody taped the bag you mean yeah Carl holding the bag okay the Bandon ship mm-hmm the Fed is stealing you know doesn't give a crap all the tape recordings nobody cares about anything happens to you the individual investor nobody nobody gives a crater on your own the next those are the first to lead stories the third story is how banks banks which have always ripped us off banks banks are banks are no tourists they're worse than Airlines for ripping off but now you can see how much money they make and now they're raising all their fees because they fear well you know most people don't are they going to go most people can't tell the difference between a 4.25 sentry and a four dollar and seventy five cent fee so we'll just raise fees some more so so those are three articles on Finance you should be discouraged but the cool thing is now the way to beat that's through education you don't beat that through complaining about you to say hey you know what we're gonna build you know we're gonna build a better mousetrap and on a better mousetrap is just more education so the 50% level it's a great starting point because most people don't where should that starting point be oh I don't know what profit I never knew a profits to take I put a straddle on in the morning it comes in 20 cents I would take it off the afternoon because I'm thinking hey that's a good trade because I was trained or I put a put a trade on it in the beginning of the week at the end of the week it's in 50 cents I'm thinking okay that's a good trade but what I'm learning now is done in a no time 50% it's great wait for your 50% got it so because straddles decay slow I'm sorry we didn't already I'm good for it so here's the study the first day of the month in the spiders not the SPS this time the spiders we go 45 days to expiration we do the same thing every time throughout the last couple of years we sold Oh at the money straddle and a one standard deviation strangle we plotted the average P&L per day and then we analyzed the percent of max profit for each strategy okay so the add to my straddle and the one standard deviations triangle plotted the average P&L per day and analyze the percent of max profit for each strategy here is the profit target and here's the trial how we compare the daily average P&L of the at the money straddle and the one standard deviation strangle so what you can see here is the average straddle credit is 769 and the strangle credit is 169 and we just wanted to first we want to give you a plot mm-hmm okay and you can see you can see right there how the how the average kind of how the P&L starts to explode they start off the same correct they start off very similar and and decay is is very measured it's very controlled and then all of a sudden you know you get to some point where it begins to accelerate as you can see this triangle very consistent the straddle has a very different look to it and we don't want to get I think that this is the first time we've shown it graphically yeah and we also don't want to paint the picture nail you should just be doing straddles all day long either of course not this is for a very small percent in fact we don't like to see anything in anybody's trading account where it's much more than 20 to 30 percent of your capital is used for undefined risk you know in most cases it's 20 to 30 percent of your trading capital it really just depends on you know how you how you bucket your capital because we don't know what everybody has sure 20 to 30 percent is kind of the number that we use next we're going to compare the strategies at 10 20 and 30 days and then at expiration will analyze the P&L averages as well as the percent of max profit and you should I think you'll find this interesting we sure did so first I'll read the pieces down below the straddle expired on average at 78 percent of max profit so a realistic management target could be in the 25 and I would say 25 to 50 percent range again we're trying to be completely open and realistic and give you all the numbers here straddle on average the straddle expire merit can never expire a hundred percent so on average over the course of how many different occurrences is this this was five years coming from guess those guys how many's decision I didn't see it in there I'll find out for once this is the spider five years five years okay so five years of study 78% of 78% of the straddle premium over five years is what came in which is consistent with what I said this morning in that 5% of the time it's going to be a little bit of a disaster 16 percent of the time it's going to be 16 percent of time I think you're going to be you know where you can where you can play with a little bit maybe they'll wiggle room you got a little wiggle room maybe they'll also be 1 times the prot one at will to 1x the profit add those two together okay five percent 16 percent is 21 percent subtract 21 percent from a hundred it comes up with 79 this number 78 I'm not that far off the numbers are what they are there's nothing else to this game everybody thinks there's just some genius out there there's no genius the numbers are just played out just do don't you do that with your eyes closed everybody can do that so 78 percent of max profit so realistic target what's what is a realistic target then is it is it 25 percent I think that's actually cheap but the boys use 25 percent could it be fifty percent sure so we'll target 50 percent and a low-end will say 25 percent and on the high end maybe a little bit higher than 50 but not really sure twenty days into the trade the strangle captured over 50% of its max profit while the straddle can be managed at 22 percent of Max game but had over 2x profit because remember the straddle is huge compared to the strangle and Premium received is huge screaming receipt to the strangle so 22 percent of Max game on the straddle is 2 x is over 2 times the profit of the strangle which 20 days in has managed at 50 percent if you think this is heavyweight to the next piece but but and you're using almost the same amount of buying power to that's the also the other kicker yes but again higher statistical chance to success easier to risk the 50% number when you are managing a strangle but the straddle at 22% actually was a bigger profit than the straddle than the strangle at 50% so 5 mistakes if you're new to trading you new to this and you're doing a strangle one-time you used to seeing a certain profit-loss number and using this X amount of buying powder you're comfortable with you might have been comfortable with this over the last couple of months couple weeks couple of years you now change it a little bit to straddles you're using the same amount of buying power so that stays the same your deltas look the same when you're putting on the trades because they're minimal but that P&L swing on that same one contract is going to be probably almost twice as much than what you're used to so it comes a little bit of a psychology thing there too listen I'm gonna I'm gonna put this is as plain English as I can which is the first view because this is good okay this is as good as the stuff gets I never had anything like this no you never had it I never a de jure none of us ever had it it would have been so much easier for us to manage our positions throughout the years and we were just talking about this over the weekend you know we're trying to talk about business at all and we really don't mm-hm we were just talking about like all the stuff that we're doing today that changes the way we do business at least you could say that you have something and that's why I'm gonna do it for I have something that's why I'm not gonna do it believes I understand the risk before it's just like okay I've got a 30 cent profit or I've got a 60 cent profit or I got a 20% profit I'm just gonna get tell you right now there's not a professional trader in the world I don't believe maybe there's a few that have these brilliant minds I'm sure there are hmm but but so so let's put this way 99.9 percent if you asked over 20 or 30 days the difference in the relationship between straddles and strangles as an average percent of max profit and you told me it was 22% to 57 percent I would have no clue I couldn't even guess those numbers like I'd not even sure if I would have guessed that way because the premium was so much bigger in the straddle you're right that I don't even know if I would have guessed that way and if you had told me 20 after 30 days with this with 45 days to go when you made the trade 28 to 67 I would had no clue you're right and again it's not because we haven't done it a million times it's just because I never thought about it that way when you look at the numbers up here it's really fascinating and if you look at over 20 days and 30 days and you look at the percent of max profits in here you understand why you have to have a independent occurrences and be lots of mm-hmm and you understand why you have to manage early because other than that it makes no sense but just look at these numbers they're fascinating agreed and we start to look at the percent of times and and just and how big the numbers are and how it starts to accelerate and and just what the difference in the two strategies are and the difference in the two management styles it's really interesting very cool what's up everybody thank you for watching our video you want to check out some more of our segments you should definitely subscribe to our channel which you can do right beside case as well as watch some more videos or you can check out tastytrade.com next to katie

Channel: tastytrade

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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, straddle spread, strangle spread, theta decay, trade profit, trade target profit, profit/loss, Straddle, Option

Id: mjABjSxn61w

Length: 11min 36sec (696 seconds)

Published: Mon Sep 29 2014