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Market Measures

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Selling Volatility | Directional vs Delta Neutral

Market Measures

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Some people eat the same exact breakfast day after day and year after year without changing a bit but while that may work well for them it's sometimes good to make a slight change from the usual in our trading, so we ran a study comparing short one standard deviation strangles to ones with a bullish or bearish bias and we present the results. Every trader can benefit from the data here.

One of our favorite trading strategies (if not the favorite) is the short one standard deviation strangle. When we enter into such a trade, or any short premium position for that matter, we can alter aspects of the trade to match our assumptions and risk profile. While gamma and Vega are often ignored in favor of delta the former two become much more important when selling volatility which is what we are doing with our short strangle.

The short strangle position is short gamma and short vega and will lose money with an increase in volatility and vice versa. So does it make sense to hedge this vega and gamma exposure with an opposing delta exposure?

A study was conducted using the four major stock index ETFs. the SPY (S&P 500 ETF), IWM (Russell 2000 ETF), QQQ (Nasdaq ETF) and the DIA (Dow Jones ETF) from 2005 to present and having 4788 occurrences was displayed. We tested 45 days to expiration (DTE) strangle strategies at the beginning of each week. We then compared three portfolio strangle strategies, delta neutral, short delta and long delta.

A table comparing the results of the short delta, delta neutral and long delta strangle strategies was displayed. The table compared the max loss, max win average P/L and percentage winner on the three strategies.

A second table comparing the results of the short delta, delta neutral and long delta strangle strategies when the VIX was above 25 was displayed. The table compared the max loss, max win average P/L and percentage winner on the three strategies. How a high VIX changes things and provides a benefit for one of the positions was explained.

Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista and Jared from the research team for the valuable takeaways and the data from our study comparing short one deviation strangles to ones with a bullish or bearish bias.

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