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Market Measures

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Scaling Up with Strangles

Market Measures

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

When our account is ready to take on more risk, we can do so in two different ways:

  • Increasing number of contracts
  • Increasing deltas of current contract size

Which strategy performs better in terms of risk reward?

Study
  • SPY, 45 DTE options
  • 2005 to present
  • Compared increasing size with two 16 delta strangles versus a one 30 delta strangle
    • All trades managed at 21 days to expiration
  • Filtered results for Implied Volatility Rank below and above 30% to see effects of greater volatility
Results

We find that the risk/reward increases proportionally for both strategies. In other words, the higher contact strategy has higher risk but higher average P/L than the higher delta strategy.

One key metric differentiates the two strategies: tail risk. The higher contract strategy is met with higher tail risk making the strategy much riskier for smaller accounts than simply increasing the delta.

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