How to make money from Making Money Trading Straddles and Strangles | Trading Data Science


How to make money from Making Money Trading Straddles and Strangles | Trading Data Science

Those confused as to why we believe in managing straddles at 25% of max profit and 1 SD strangles at 50% won’t be after watching this segment which makes it all clear. The Doctor makes a house call to cure your confusion.

We are often asked why we believe in managing straddles at 25% and strangles at 50% of max profit. Dr. Data (Michael Rechenthin, Ph.D.) explains it all and makes it clear. He begins by explaining the theoretical option pricing model reasons first. He follows that up with some strong empirical data.

The first graph shows the theoretical effect of Theta on both a straddle and a strangle. Some notations are added which show profit levels at different time frames along with the percentage of max profit. Mike makes clear that the key figure is profit per day.

Another graph shows a straddle versus several different strangles. It makes clear that it takes much more time to reach 50% of max profit on a straddle and that the farther you go out on a strangle the faster you achieve the 50% level. Gamma risk is why it’s a big mistake to hold a straddle to expiration. Gamma risk “explodes” in the last few days.

The empirical data was shown next. Dr. Data first gave us the info for a 1 SD strangle. The results of managing at 25%, 50% and held until expiration and the median average for each was listed for P/L, days held, and most importantly P/L per day were show, Mike emphasizes that we should be concerned about the efficient use of capital. A similar table is shown for straddles. The results are noteworthy.

See more Skinny on Options: http://ow.ly/YLyis

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5 Comments

  • wnc817 says:

    I wonder how options commissions play into these numbers..

  • David says:

    I know this is just an example, but may someone explain to me what does IV at 15 means? At beginning of the video, it says price is $200, IV is 15. On my thinkorswim, IV is always in percentage. So, does 15 = 15%?

  • Next Level says:

    Hi guys, great show, I'm psyched to have found your site!. Just one question I hope you can answer for me. On all of your videos like this that summarize back tested data, there are always boxes that have p/l. When the p/l for the last 5 years is $45,000, what does that mean? It seems like this information is lacking context. The p/l numbers could be great if they came from a small investment, but if you needed $100,000 to get a $45k p/l over 5 years, well that kinda sucks. What am I missing?

  • warever37 says:

    but why sell Straddles? When was ever the price constant through out the life of the Options?

  • 1) What was the average P/L? 2) How where trades handled that could not be closed for 25% / 50% profit? held to expiration? This study seems to be quite skewed.. In option's trading it is easy to have positive median p/l and still lose money at least when the average p/l is negative..

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