Trading High Probability Strangles

all right this is a market measure segment I think you're gonna like it's a continuation of just a lot of the stuff that we just continuation of a lot of stuff we do it's called high probability strangles but but in the in the truest sense we said okay let's beat this thing up every which way because we don't want anybody ever coming back and taking a look at our stuff and saying hey you know what you missed this you missed this you didn't do this our studies are not designed to be kind of the classic scientific studies I mean we're not we're not doing this for grants we're not doing this to show anybody but our but our listeners so I guess in the most classic sense they are not scientific but they are all very focused and very specific our trading strategy looks to place trades and capitalize on the intelligent use of probabilities while effectively timing entry to correspond with periods of high implied volatility rank and again reading this up every which way we never know what stuff's gonna hit home with which users so we keep attacking these broad these broad issues that nobody's ever attacked before in with the idea that it will generate interests simulate engagement it has for us of course okay because we do the same thing so once trades are place we look to manage our winners an attempt to maximize return on capital relative to remaining duration we look for efficient trade exit based on P&L per day basis so among all the things that we're trying to do and again this is one of the reasons we're building our own technology now so that we can implement so we can implement in our own technology a lot of the stuff that we talk about in the show one of the things we talk about is P&L per day and what we're trying to do is to create a relationship between return on capital and P&L per day which would suggest that managing winners early with the highest P&L per day is probably the most effective way to trade sounds logical we seldom hold trades through exploration one reason is due to the slowing of time decay four out of the money options is expiration years and the reason is that any near near the money option may result in a large gamma position in these cases even a small move in the underlying can result in a large loss or a large change in Delta doesn't necessary to be a loss when we consider large indices with high implied volatility rank those that have IV rank over 50% we look to make high probability traits so what is the most effective management style in regard to P&L per day again what we're trying to do is answer the age-old question when do I manage my trades okay you're suggesting 25 or 50 percent of max profit but even be more specific than that give me a relationship between return on capital total return and P&L per day what you see right now on the technology that we've that we're delivering through dough is we show the probability of profit and the return on capital as your primary two guiding lights right through the technology we're gonna take that a couple steps further so we decided to conduct a study looking at three different indices the SPX the NASDAQ and the rut we decided to go back five years we decided to take out earnings plays beek that's why we use these underlined so there's no jump in implied volatility due to earnings here right so a lot of people still don't want to trade earnings of that cuts fine so we looked at the three data we looked at the three biggest indices we went back five years we looked at entry points where implied volatility ranked above the 50% level and on those days we sold those to standard deviations triangles that the person was talking about and confirm and send this morning 97.5 out of the money per leg this is not something that you can do on a normal this is not something that you can do one a normal cheap stock or anything like that we then manage the winners of 25 50 and 75 percent of max profit to avoid settlement risk we compared managing winners at these levels to closing the day prior to expiration and again all this is archived so you can go right back and check it out in the nd acts we found is is some very interesting stuff first of all over the last five years and this is probably the most important thing because everybody always sits around says well how did Karen do this how did she do this how come nobody else is free you know what trader maybe they had better research than everybody else so maybe she attacked some things that people hadn't done before but I have to tell you one thing the results when you start to look at this you know what at to see a deviation boot which is the first thing she said when she was on the show the number of winners were 15 out of 15 that's for five years that's for five years it's only three times a year hmm but you can see the the the max profit and you can also see the average P&L per day cuz you're doing an IV rank over 50 correct so you can see the argument for holding it shorter because if you hold it shorter you made less money but you took you made a ridiculous amount of money in a short period of time and your average days held was you know crazy and a winning percentage was the same all the way across that's for the ndx now again this is for this is for going high probability strangles way out like two standard deviations because that's what people were asking let's go next slide and again this all had to do with high IV rank so here's the rut now this is hard to argue with 12 out of 12 winners on the last slide right 59 59 12 out of 12 here and and it only gets when you wait for absolute max profit but again number of days held it never made sense this was the craziest pieces this whole puzzle was that everything that we're researching now confirms that 25 to 50 percent of max profit because at 50 percent of max profit your average whole time was 12 days verse 43 days the amount of money you made was virtually the same and a P&L per day was huge so what we're seeing is this early contraction from very high implied volatility levels and we're seeing this ridiculous payout so again the arguments being made by people that oh no no that's not how you trade is it's not true right it's not true if you pick your spots based on implied volatility the numbers just they don't support kind of the classic discussion here's the SPX and again these numbers of course they're all going to be very close the same 12 out of 12 winners 6 6 days held average P&L per day everything looks the same there were in these cases 50 fifteen twelve and twelve were the number of times that implied volatility over five years traded over the 50 percentile and there was enough premium to sell a to standard deviation strangle so it's not something that happens very often that's the first thing it happens two and a half times a year right will be averaged them all together it happened two and a half times a year so this was eight we've been in a low-volatility environment also right I mean the last five years volatility has been continually going down correct so so again bull markets contracting volatility huge winner for the last half a decade and managing winners consistently comes out on top yeah they're all winners I mean in this example in SPX they're all winners but that's 25 to 50 percent seems like it's it's the place to be I mean you're using a lot of money to do this right I mean 30 grand or so a ton of money right so we did was we did a portfolio page and what you can see here is on the portfolio page again if you look at the average P&L per day which is the last column Tony and you look at the average line the bottom column and then the average number of days held working out from the bottom I mean this is the kind of stuff which i think is and again we didn't do this we we weren't we weren't really at this level to be able to have the confidence to be able to do this because it was against everything we'd ever been taught so you'd sit that is true so do you put this on small every time it happens from now on it's an absolute no-brainer how's that there is not a there's not a chance that this hasn't worked into my portfolio um again now but but I've learned a lot in the last two and a half years and for 30 years I was trained not to do this myself included okay this might be clear we're not gonna add to this you're gonna put on you know not one time your allotment and then you're gonna set it and kind of forget it and manage the winner so the discussion comes down to you walk in to us you walk into a money managers office and the money manager says to you listen at 50 percent I have a strategy that's only that's only been available thirty nine times in the last five years and let's talk about the amount of cash it requires to do this probably probably each one lot was 25,000 so for five-year return and I'm just bullsh kind of let's say it's 20,000 mm for a five-year return okay we're talking about six thousand dollars on a twenty thousand dollar count we're essentially talking about a thirty percent return for we're talking about thirty percent return for five years six percent a year so with a hundred percent success rate correct so so so this has becomes an interesting discussion of which the average number of days held for five years because remember five years worth of days is 2,000 days average number of days held here would be 4 in this case 49 times 14 so you're you're talking about well 50 times 14 so maybe 700 days okay yeah okay it works what am I saying 40 times 40 times yeah you're probably talking about a little less but let's call it 600 and so because I'm not sure we actually take this off 5 to 600 days so 5 to 600 days out of what out of what would be about 2,000 mm-hmm so you're holding approximately one quarter percent of the time for a hundred percent probability success for a six percent return on capital I'm not saying it's the end of the world I'm just saying it's a very interesting high probability statistic better than what you can get anywhere else on that time period well the same for a percentage of return on capital yeah okay okay that's fair but it has risk I guess the point is that if you walked in somewhere and you sat down with the money managed to listen for the last five years we've been applying this strategy which makes about six percent a year on average and but our success rate has been very close to a hundred percent and in addition to that we only deploy capital about maybe one third of the time so we're deploying capital one third of the time and we're making about six percent a year with close to percent success rate it's interesting it is interesting because I don't you know I don't have anybody else presents it that way well that's the world of derivatives from a different light mm-hmm I agree I don't know if any else presents that way it's interesting very good sir

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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, high probability strangles

Id: b_9KN3iKgDQ

Length: 11min 36sec (696 seconds)

Published: Fri Nov 15 2013