Managing Tested Options Positions

for both to find it undefined risk trades risk is managed on order entry so we look to sell high IV rank with the probabilities that we choose when an undefined trade gets tested we may look to adjust one method to achieve this is by repositioning the trade so we did as we went out and said hey you know what let's take a look at some of the things we do and do we even benefit forget about the cost for one second forget about the cost of resource mm-hmm listen if if this is if you're new to tastytrade I'm Tom saws knife he's Tony Batista and this is some of the kind of out there discussions that we have but don't worry we're gonna hit you over the head once we're done with this we're hit you over the head with the Skien options math and you're gonna think this is extremely high level what we're covering today maybe it is a little bit but don't worry we're all over the place we're not that smart mm-hmm so so we're just what it needs to be done we have very good a very good team to do this we generally will look to roll the untested side to recreate the initial probability this or something close to that this additional threat isn't how much time has gone by depends how much premium okay that is the next day sure can you can do it what happens two weeks later you're not gonna be able to but it just it's it's the put its to put ourselves back in the game that's all it is the additional credit received increase received increases risk widens break evens and increases overall probability success I think you put an interesting analogy on the board the other day you you're a Cubs fan no yeah little bit you're okay we have a stinky team yes so but but the but Wrigley fields always jammed yes so you want to take your kids to the game so you go buy tickets at Wrigley Field so you buy upperdeck tickets because it's all that's available and they're not ridiculously expensive you pay $50 for two upper deck tickets sure so the Cubs are losing six nothing you can sit wherever you want well there's six they're losing they're losing six nothing and now it's the bottom of the fifth inning so it's an official game so you say we're down six nothing but I gonna go from my $50 seats upper deck I'm gonna walk down to the lower deck because there's nobody there anymore so you take you walk down to the lower deck now you've got better seats but you got a crappy teens because the same to same crappy team you're down six nothing now did you you know did you improve yeah it's that's a real question like I mean you're still would you rather would you rather win the game and sit upstairs in the crappy seats or would rather improve your seats and and still have that high probability of losing the game that's kind of what we're dealing with here it's it's that you know I'm not sure which way I would have chosen I maybe I would have taken the crappier seats in return for winning the game right the additional credit receive increases risk widespread evens and increases the overall probability of success the decision to roll is always based on if the additional credit is worth the additional risk taken the amount received is arbitrary and will largely depend on the time remaining in the cycle mm-hmm okay if we are sure to strangle where each leg has a probability in the money of 16 percent and one of the strikes is being tested we may look to roll the untested side which is presumably worthless are worth less to a new 16 percent statistical chance of being in the money so we do a strangle we choose a one standard deviation move which is 16 percent on each side those are the options that we sell 16% chance of being in the money so at the money's here we're selling the call up here and the put down here there is a 16 percent chance of going up to the short strike here and a 16 percent chance of going to the short strike here will standard deviation on bullets that's right so what happens then next is the underlying goes up and it goes up towards our short strike it's testing us now because there's about a 32% chance that we'll be tested even though is only a 16% chance that it gets up here okay now this strike we've done this strike down here not worth anything anymore mm-hm so the question becomes the pennies the question becomes should we take this strike and roll it up to the new 16 percent number to collect because now it's about 6 so roll it up to the new 16 percent number collect a little bit more premium and see what happens from there you're not changing your buying power so for our study we looked at II W the SPX and the IWM over the last five years so the Mexican markets the S&P 500 and the Russell 2000 we sold a one standard deviation strangle when the IV rank because we wouldn't be selling this without the IB rank this is one of the changes we've made recently to our studies across the 50 percent number closest to 45 days to expiration if one of the strikes was touched we rolled the untested side to 16% chances of being in the money again so we rolled the far out of the money option the untested side up to the 1 to the 16 percent chance of being the money we compared managing this to no management at all just to say is it worth our resources to roll this position up got it now just to be clear cuz I'm getting emails about what the untested side is that would be the side the opposite direction that the stock is going that's correct okay again all of this will be archived you can mark down to today's date it's Thursday December 5th it's 8:50 6:00 in the morning and all this is in there or will be in there as of today so let's take a look first at the SPX so the IV rank is 65% the average credit received for the 145 days out for the one standard deviation strangle when the IV rank is over 50 was just under $20 now the additional credit that we received by rolling up with six dollars and forty eight cents and the percent of the time that it was tested was 40 percent now think about this it's supposed to be tested about 33 percent of time it was actually tested 40 percent of time interesting but we are we are coming from a situation where the starting implied volatility is low the P&L with no management was $12,700 the P&L with rolling up the untested side was about $2,500 better we went from twelve thousand seven hundred dollars to fifteen thousand three hundred dollars the number of wins stayed the same and the percentage of wins stayed the same so all we did was add approximately 20% in additional P&L now the question becomes is 20% in additional P&L worth it correct that's I don't know the answer Shan I don't know the answer either okay and and in this case is $2,500 on a you know when we're talking about 12,500 to 15,000 it's approximately 20% do you make those adjustments for 20% this is five years worth of research five years worth of research in the SPX this is the stuff you know I know this sounds we say it every day it all comes down to like your own comfortable atiim of that's not the right word comfortability yes its comfort index it's a comfort okay that's correct I mean it's a mechanical index for sure yeah if you feel like you're being proactive and you're watching your position and you're even getting paid a little bit for it in this example then sure it makes sense even if the numbers were reversed a little bit where you weren't but it gave you something like you were being active and you were you were managing the pictures and I say you know what I guess it's okay to but you know what six of one half doesn't have another okay I will tell you one thing if you can articulate this and you can explain this the way we're explaining this right now you are so far more advanced than anybody else this industry you should pat yourself on the back and say hey you know what I'm learning stuff right now that listen I know these guys don't know which way the markets going and I know these guys don't really you know they don't even know whether they should do this or not but the fact that we can explain it talk about it engage with it and discuss it is extremely powerful and so all power to you just put this in your back pocket so let's take a look at IWM average IV rank is 55% the average additional credit is a dollar thirty one I'm sorry the average credits dollar 31 the average additional credit 61 cents the percent of the time tested is 30% so the SPX was tested forty percent of time the IWM was tested thirty percent of time remember what you're supposed to be tested 33 2 times 16 and change 33 34 percent time that's called probability of a touch is the same thing as percent touch tested this is so cool when you understand how the numbers work that you won't say oh man you guys suck because you could say that about almost everybody yesterday somebody writes me what do you think about this person in the business like oh they suck does it understand you this stuff you know and so so I'm honest about listen I don't like hey okay he's a nice guy here's no crap because this stuff is all foreign you guys understand this so the person with this in the case of IWM you made 1200 hours with 1277 dollars with no management over 5 years if you rolled up you actually did worse this is why these are mixed results yeah so people always go why aren't you rolling because listen I don't know that they're gonna go straight up I mean it's in hindsight it's easy to say wow they went straight up you know who woulda thunk that in the case of iwi over the last five years rolling up actually cost you money okay like I said so we go to e WW and in this case the IV rank is 68% the percent tested was 46 percent of the time so it was up in aaww there was a it was a real big test the additional credit was only 23 cents with no management you made $12,000 and 50 with management you made 1,200 bucks so net net in the end you did 15% better percentage stayed the same percentage winners say the same these are what we call marginal marginal mixed results so again 15% better and II W W it was almost 20% worse than IWM and it was 20% better in SPX you know what for me I think my time is better spent doing nothing and finding another trade to look for this is a this is a great discussion this is you know what you have to see in these results with your brain and I'm not saying this negatively this is a great time this is a great discussion you can have internally

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, market measures

Id: 4PXxStV0D5g

Length: 10min 38sec (638 seconds)

Published: Thu Dec 05 2013