Good study, but I think your running P/L graph is significantly misleading. The capital required to sell daily strangles in SPY is much higher than to sell iron condors daily. The comparison is apples and oranges. Would it be better to compare a selected portfolio size at the beginning and to analyzing X% of portfolio daily into the strategies? It may mean you sell 3 iron condors for every one strangle, but it is more representative of a P/L statement. I predict it would also significantly change your drawdown stats showing the ICs as more risky, as on a per margin $ requirement, the iron condors exhibit as much if not more drawdown potential than the strangle. Thoughts?
Thanks for the feedback! I realize now that I forgot to mention the running P/L graphs were shown not to simulate an actual strategy of selling each position daily, but to demonstrate the relative performance of each approach without having the sensitivity of different start dates. Either way, you are correct, more iron condors would be able to be sold for each strangle. In this particular study, the comparison was meant to highlight the differences in choosing the less risky strategy (iron condor) over the more risky strategy (strangle) over time. The next step could be what you're suggesting, which is to match the capital allocation of each approach to see if selling more iron condors instead of one strangle is a more viable approach in terms of risk. I suspect your hypothesis in that regard will also be correct! -Chris
Thanks Chris - and I totally get what you were intending. I just wanted to make that call out because I know many beginning traders will make the assumption that dollar for dollar, Iron condors are a "less risky" strategy, and that may still not be the case. Love your work, keep it up!
I totally agree but rather than buying more of the same it's probably better to stay small in each asset but trade more assets. That way you're mitigating some of the risk. Either way ICs are better for smaller accounts.
Same thought, would the Return on BP used be higher overall for ICs (Most optimal possibly being 16 Delta / 5 Delta) over Strangle. But per your analysis, the VIX or the IVP of the underlying should be considered. If IV is low, Strangles may be better, and IV is high, need more protection with ICs.
@@sedul2006 Yes that makes sense I think that is what the charts are saying. 2010 - 2017 were low vix periods that's why the Strangles ultimately ended up better. But in 2008 and 2009 the the market had much higher volatility and the strangles were under water when the market crashed in 2009.
Thanks Chris..your conclusion on high vs low vol suggests mean reversion of vol would not hold and low vol may further lead to lower vols and vice versa.
Hi. when you make an iron condor most of the time if you use Delta you will end up with an unbalanced iron condor. My question is if this test was made with unbalanced iron condors or with 1/3 width of stikes is the 16/10 iron condor.
Hey, when you say 16-delta short and 30-delta short options, do you mean they're estimated to have a 16% chance of failure and 30% chance of failure? If not, can you explain what you mean by those terms? I'm pretty fresh to options trading.
Does the study includes commissions and if yes, at which rates? What is the capital needed to daily trade a SPY IC @delta16/5 with around 60 dte held to expiration? How did you deal with b/a spreads?
Hi Trader 68, The study does not include commissions. It depends on how volatile the market is, as more market volatility will mean the 16/5 put spread will likely be wider. Currently, the ~60 DTE 16/5 Iron Condor on SPY is the November 248/270/300/308 for $1.75. The max profit is $175 per Iron Condor and the max loss is $2,025. Based on that, the margin requirement/capital needed to sell this position would be $2,025. In this study, I took the midpoint of the bid-ask spreads. Hope this helps! -Chris
Since your IC widths are based on deltas and not a fixed width, they are going to vary in width (meaning different max win/loss scenarios). Higher IV will yield wider spreads, which probably has a lot to do with why you saw worse performance in high IV environments. It's also worth pointing out that managing winners and/or losers would have drastically improved your outcomes. Great video, as always!
Hi Chris, Would you be able to update this study to include 2018 and January 2019? It would be good to know how these strategies withstood the historic volatility in Nov/Dec & price upswing in Jan 2019.
Hi Walter, That would be a great idea and a topic I'd enjoy revisiting. I'll add it to the list of videos to make soon! Thanks for the suggestion. -Chris
Sandy, Thanks for the comment! I am not sure of the results off the top of my head, but I would guess that if you sold closer options and/or sold shorter maturities, the maximum losses observed would increase. However, when selling options closer to at-the-money, the premium collected will be higher and therefore the profits on some trades will be more significant.
They way you described delta as (probability of the underlying expiring in the money confused me.) By my understanding delta represents your directional risk and the amount the price of the option will "move" as the underlying moves a dollar. (Bullish= Long delta/ Bearish= short delta) Not probability of expiring in the money. Newbie please help.
You are correct! Delta is the amount an option's price is expected to change with each $1 change in the stock price. However, delta is also sometimes used as an approximation of the option's probability of expiring in-the-money. If you look at at-the-money options, the delta is typically very close to +/- 0.50, which indicates about a 50% probability of expiring in-the-money. That makes sense considering many operate under the assumption that stock prices are random. I know it's confusing to have multiple correct interpretations of delta, but that's the way it is in the options world. It all depends on the context in which you're referencing delta. 90% of the time when talking about delta, traders are referring to the directional exposure of the position (as you've mentioned). I hope this helps! -Chris
Hi Chris, these finding are different to what tastytrade research about, tastytrade claim the high IV boost more POP opportunity, would you mind explain here?
Zhenyu, I am not sure which study you are referring to in specific. The study in this video did not test the results for closing winning trades (which tastytrade often does), which will give different/better results in terms of win percentage. In my study, the findings show that the biggest losses have historically occurred when selling options in high implied volatility environments (in this case, above the long-term median of 17.5). This is more important to me than the percentage of profitable trades. To answer your question, when selling options in super high IV, you are able to sell options at strike prices far away from the stock price, which is a huge advantage IF the stock's price fluctuations become smaller after you sell the strangle (since a decrease in realized volatility will very likely lead to a decrease in IV/option prices). However, since the market/stock is typically extremely volatile when you're selling those "expensive" options, there's still a chance that the stock blows through one of your short strikes despite those strikes being further away from the stock price compared to a lower IV entry.
thank you! that make sense, i believe tastytrade and you both emphasize the active management for undefined strategy like the strangle. that seems the only way to increase POP regardless of IV environment. high IV definitely comes with high risk. the profit/loss target should adjust accordingly in my options
Zhenyu, You are correct. If you close winning trades early, your percentage of profitable trades will increase compared to taking profits later. However, when taking partial profits and letting losses run, you need a higher percentage of profitable trades just to break even. I have a video on this topic here: ruclips.net/video/GridJxeJMkE/видео.html
Assumption is that you do not do any trade adjustment ?, I mean rolling the unchallenged strikes towards the stock price , thank you. wonderful analysis and extremely important information.
Great study. My question is comparing 16/5 to 16/10. If I use 16/5 and decrease my lots to equal 16/10 max profit, will I get to 50% of max profit faster?
Why is the win rate different for Iron condor and strangles as both of them use 16-delta, their win rates must have been same, if the price was in-between at the expiry.
Because they collect a different amount of option premium. More option premium is collected when selling a strangle vs. iron condor (assuming both trades use the same short options) because options are not purchased against the short options when selling strangles. More option premium collected = wider breakeven prices = higher probability of making money. The win rate is not the percentage of trades where the stock was in-between the short strikes at expiration. The win rate is the percentage of trades where the stock price was in-between the breakeven prices at expiration. Comparing a strangle to an iron condor, a strangle will have wider breakeven prices because of the higher premium collected at entry (assuming the same options are sold in the strangle and iron condor).
Option deltas are always between -1 and 1, correct. However, it is common for traders to reference option deltas as integers instead of decimals. For example, if I say "50-delta" option, I am referring to a 0.50 delta option. If I say 16-delta option, I mean an option with a delta of 0.16. It's just a way options traders refer to deltas sometimes, but I understand how it can be confusing.
16 delta means the options have a delta of about 16 or 0.16 when entering the trades. The delta of 16 or 0.16 means the options have an estimated 16% probability of expiring in-the-money. 30 delta options have an estimated 30% probability of expiring in-the-money. When comparing the two, 16-delta options will be at strike prices further from the stock price than 30-delta options, as there's a lower chance for the stock price to reach further stock prices by expiration. I hope this helps! -Chris
I got a little confused when he was talking about the VIX. Because there’s a lot of emphasis on the individual volatility of the stocks when trading options. But he was talking about the overall volatility of the stock market I believe so that creates a question of what happens when the individual stockhas high volatility versus non-high volatility in the stock market and the individual volatility. This creates a lot of combinations? Like low volatility stock, low volatility stock market, high volatility stock versus high or low volatility stock market etc... I guess you can consider that an area of inquiry for the future options geeks.
Hi Chris, Thanks for the video! I may be missing something but the first table you show “iron condor be strangers by the numbers”, all of the strategies seem to have a negative expected value over the long run. This is found by taking the probability of profit times average profit minus the probability of loss times average loss. They all are negative. I’m wondering how the made money in the PL plot. Thanks!
Can you please do an updated version of this video for last 10 years in SPY. Also, please start making contents for Indian options data, options trading is growing rapidly and India is now one of the largest derivatives market.
My conclusions: * Low VIX ==> Strangles, if you don't consider position sizing. Regardless of that last factor, it's clear that strangles perform better in low-VIX environments. So if you find yourself biased towards trading one for whatever reason, you can also factor in VIX as a positive or negative aspect to the trade. * High VIX ==> 30/10 Iron Condors, almost no difference to low-VIX environment. Do note that very high VIX might have different effects on your trades; I have no experience yet with multi-leg options trading (hence watching these studies and whatnot first) but I bet that a few years of trading would make you feel the difference between 40 VIX and 20 VIX even though here they were undifferentiated. Another study by projectoption highlights how very high VIX can completely change Iron Condors and actually favor them if they are managed properly with stop losses and profit takers. Another aspect behind this is trading the legs at different points in time, rather than initiating the longs and shorts simultaneously, leaving a lot to be experimented as we take these findings as a basis point of knowledge and insight in our options trading. Also, what someone else pointed out: it would be nice to see a study comparing two strats when taking into account capital allocation! The underlying thing you are testing then is cumulative P/L over drawdown, since less drawdown means you can leverage more (obviously with needed margins of safety as there will always be new, perhaps larger crashes and rallies in the future). In that case, the ratio itself is enough to give a fair indication. Great videos, amazing content, looking forward to more!
Definitely! Especially with the strong bull market period we've experienced over the past 10 years. I can test the strategies and put together a video with the results. -Chris
Hi Chris. I can visualise 1SD(68%)& 2SD(95%) in terms of width(OTM) on bell curve. But when they say 16 delta, 30 delta - I cannot understand how much POP it stands. Is there a tutorial on that? Sorry am a noob so don't mind :)
Rajesh, Great question and it's not obvious at first! It depends on if you're selling one side or both sides. If you just sell a call option with a delta of 16, the option has a 16% chance of expiring in-the-money, which means an 84% chance of expiring out-of-the-money. So, if you sell one side, the POP is 100 - delta (100 - 16 Delta = 84% chance of expiring OTM). If you sell both sides, then you need to subtract both option deltas from 100. So, if you sell a 20-delta call and a 15-delta put, the POP estimation would be: 100 - 20 Delta - 15 Delta = 65% chance of expiring OTM. Does this help? Please let me know if you need additional explanations! -Chris
Im currently looking at an active trade where the underlying is In my spread for a loss. But my delta is a 8.00. By my understand with this description my POP would be 92% but the trade expires in two days and is losing. Delta is confusing me to no end!
Also, why is the win rate of 16 delta strangle more than 68%? As delta also represents the probability of price crossing the strike price at expiry. So over the period time, if the probability principle is correct shouldn't win rate be close to 68%, unless we set some predetermined profit level which we have not done in this video.
1) The breakeven prices of a short strangle will be beyond the short strikes, which means the probability of the trade making money at all is higher than the probability of the trade expiring worthless (which is what delta estimates -- the probability of an option expiring in-the-money). 2) If we account for the fact that historically, on average, realized volatility is less than implied volatility, then we'd expect a 16-delta short strangle to expire worthless more than 68% of the time.
...and Tom aired a segment where he advised to sell straddles when IVR is above 80. :/ I'm more convinced now that TT is for people who love trading more than they love income..
what is the best time to exit from bleeding strangle?
Hi Cris, do you have any plan to do an update of this P/L analysis with the latest especially the March 20 data 😊
Good study, but I think your running P/L graph is significantly misleading. The capital required to sell daily strangles in SPY is much higher than to sell iron condors daily. The comparison is apples and oranges. Would it be better to compare a selected portfolio size at the beginning and to analyzing X% of portfolio daily into the strategies? It may mean you sell 3 iron condors for every one strangle, but it is more representative of a P/L statement.
I predict it would also significantly change your drawdown stats showing the ICs as more risky, as on a per margin $ requirement, the iron condors exhibit as much if not more drawdown potential than the strangle.
Thoughts?
Thanks for the feedback!
I realize now that I forgot to mention the running P/L graphs were shown not to simulate an actual strategy of selling each position daily, but to demonstrate the relative performance of each approach without having the sensitivity of different start dates.
Either way, you are correct, more iron condors would be able to be sold for each strangle.
In this particular study, the comparison was meant to highlight the differences in choosing the less risky strategy (iron condor) over the more risky strategy (strangle) over time.
The next step could be what you're suggesting, which is to match the capital allocation of each approach to see if selling more iron condors instead of one strangle is a more viable approach in terms of risk. I suspect your hypothesis in that regard will also be correct!
-Chris
Thanks Chris - and I totally get what you were intending. I just wanted to make that call out because I know many beginning traders will make the assumption that dollar for dollar, Iron condors are a "less risky" strategy, and that may still not be the case.
Love your work, keep it up!
I totally agree but rather than buying more of the same it's probably better to stay small in each asset but trade more assets. That way you're mitigating some of the risk. Either way ICs are better for smaller accounts.
Same thought, would the Return on BP used be higher overall for ICs (Most optimal possibly being 16 Delta / 5 Delta) over Strangle. But per your analysis, the VIX or the IVP of the underlying should be considered. If IV is low, Strangles may be better, and IV is high, need more protection with ICs.
@@sedul2006 Yes that makes sense I think that is what the charts are saying. 2010 - 2017 were low vix periods that's why the Strangles ultimately ended up better. But in 2008 and 2009 the the market had much higher volatility and the strangles were under water when the market crashed in 2009.
Thanks Chris..your conclusion on high vs low vol suggests mean reversion of vol would not hold and low vol may further lead to lower vols and vice versa.
Hi. when you make an iron condor most of the time if you use Delta you will end up with an unbalanced iron condor. My question is if this test was made with unbalanced iron condors or with 1/3 width of stikes is the 16/10 iron condor.
Hey, when you say 16-delta short and 30-delta short options, do you mean they're estimated to have a 16% chance of failure and 30% chance of failure? If not, can you explain what you mean by those terms? I'm pretty fresh to options trading.
I would like to see a p&l graph when our strategy is to sell strangles when vix17.5
Does the study includes commissions and if yes, at which rates? What is the capital needed to daily trade a SPY IC @delta16/5 with around 60 dte held to expiration? How did you deal with b/a spreads?
Hi Trader 68,
The study does not include commissions.
It depends on how volatile the market is, as more market volatility will mean the 16/5 put spread will likely be wider.
Currently, the ~60 DTE 16/5 Iron Condor on SPY is the November 248/270/300/308 for $1.75. The max profit is $175 per Iron Condor and the max loss is $2,025. Based on that, the margin requirement/capital needed to sell this position would be $2,025.
In this study, I took the midpoint of the bid-ask spreads.
Hope this helps!
-Chris
Since your IC widths are based on deltas and not a fixed width, they are going to vary in width (meaning different max win/loss scenarios). Higher IV will yield wider spreads, which probably has a lot to do with why you saw worse performance in high IV environments.
It's also worth pointing out that managing winners and/or losers would have drastically improved your outcomes.
Great video, as always!
What would you recommend as a way to control for this?
How it compares with the money invested? Strangles requires way much 10x maintenance capital than Iron condor
Hi Chris,
Would you be able to update this study to include 2018 and January 2019? It would be good to know how these strategies withstood the historic volatility in Nov/Dec & price upswing in Jan 2019.
Hi Walter,
That would be a great idea and a topic I'd enjoy revisiting. I'll add it to the list of videos to make soon!
Thanks for the suggestion.
-Chris
amazing analysis
Thank you!
Thanks Chris great analysis.
Any idea what happens if you go closer to the money -say 35 delta strangles...? And maybe sell shorter maturities? Thanks
Sandy,
Thanks for the comment!
I am not sure of the results off the top of my head, but I would guess that if you sold closer options and/or sold shorter maturities, the maximum losses observed would increase. However, when selling options closer to at-the-money, the premium collected will be higher and therefore the profits on some trades will be more significant.
They way you described delta as (probability of the underlying expiring in the money confused me.) By my understanding delta represents your directional risk and the amount the price of the option will "move" as the underlying moves a dollar. (Bullish= Long delta/ Bearish= short delta) Not probability of expiring in the money. Newbie please help.
You are correct! Delta is the amount an option's price is expected to change with each $1 change in the stock price.
However, delta is also sometimes used as an approximation of the option's probability of expiring in-the-money. If you look at at-the-money options, the delta is typically very close to +/- 0.50, which indicates about a 50% probability of expiring in-the-money. That makes sense considering many operate under the assumption that stock prices are random.
I know it's confusing to have multiple correct interpretations of delta, but that's the way it is in the options world. It all depends on the context in which you're referencing delta. 90% of the time when talking about delta, traders are referring to the directional exposure of the position (as you've mentioned).
I hope this helps!
-Chris
Thanks so much boss youre the man!
Hi Chris, these finding are different to what tastytrade research about, tastytrade claim the high IV boost more POP opportunity, would you mind explain here?
Zhenyu,
I am not sure which study you are referring to in specific.
The study in this video did not test the results for closing winning trades (which tastytrade often does), which will give different/better results in terms of win percentage.
In my study, the findings show that the biggest losses have historically occurred when selling options in high implied volatility environments (in this case, above the long-term median of 17.5). This is more important to me than the percentage of profitable trades.
To answer your question, when selling options in super high IV, you are able to sell options at strike prices far away from the stock price, which is a huge advantage IF the stock's price fluctuations become smaller after you sell the strangle (since a decrease in realized volatility will very likely lead to a decrease in IV/option prices). However, since the market/stock is typically extremely volatile when you're selling those "expensive" options, there's still a chance that the stock blows through one of your short strikes despite those strikes being further away from the stock price compared to a lower IV entry.
thank you! that make sense, i believe tastytrade and you both emphasize the active management for undefined strategy like the strangle. that seems the only way to increase POP regardless of IV environment. high IV definitely comes with high risk. the profit/loss target should adjust accordingly in my options
Zhenyu,
You are correct. If you close winning trades early, your percentage of profitable trades will increase compared to taking profits later. However, when taking partial profits and letting losses run, you need a higher percentage of profitable trades just to break even. I have a video on this topic here: ruclips.net/video/GridJxeJMkE/видео.html
Awesome study! What tools do you use to backtest your Analysis?
How many contracts here?
Assumption is that you do not do any trade adjustment ?, I mean rolling the unchallenged strikes towards the stock price , thank you. wonderful analysis and extremely important information.
Great study. My question is comparing 16/5 to 16/10. If I use 16/5 and decrease my lots to equal 16/10 max profit, will I get to 50% of max profit faster?
Why is the win rate different for Iron condor and strangles as both of them use 16-delta, their win rates must have been same, if the price was in-between at the expiry.
Because they collect a different amount of option premium. More option premium is collected when selling a strangle vs. iron condor (assuming both trades use the same short options) because options are not purchased against the short options when selling strangles.
More option premium collected = wider breakeven prices = higher probability of making money.
The win rate is not the percentage of trades where the stock was in-between the short strikes at expiration. The win rate is the percentage of trades where the stock price was in-between the breakeven prices at expiration.
Comparing a strangle to an iron condor, a strangle will have wider breakeven prices because of the higher premium collected at entry (assuming the same options are sold in the strangle and iron condor).
@@projectfinance thank you so much
Fantastic study. I wanted to ask how you got the data for this. Hard to imagine that you actually put 6 trades a day for 10 years lol.
Dmitry,
I've purchased historical option data. I use Python to create backtesting programs to automate the entering and exiting of positions.
@@projectfinance hey man. can you recommend a data source for this today? i did this once or twice from CBOE but it was expensive.
Great video, I love the thoroughness. I am curious like @Kittyboyfan of where to purchase options history on a retail trader's budget.
Thank you so much
Superb explanation.....precise information...I was searching for but was unable to find in books or forums
What does it mean by 5,10,16 Delta?? In India Delta never go beyond -1 to +1. Please clarify it.
Option deltas are always between -1 and 1, correct. However, it is common for traders to reference option deltas as integers instead of decimals. For example, if I say "50-delta" option, I am referring to a 0.50 delta option.
If I say 16-delta option, I mean an option with a delta of 0.16. It's just a way options traders refer to deltas sometimes, but I understand how it can be confusing.
@@projectfinance thanks for reply 👍👍👍👍👍👍👍
Thanks a lot for sharing nice information. l know option greeks.kindly let me know what is 16 Delta and 30 Delta.
16 delta means the options have a delta of about 16 or 0.16 when entering the trades. The delta of 16 or 0.16 means the options have an estimated 16% probability of expiring in-the-money. 30 delta options have an estimated 30% probability of expiring in-the-money.
When comparing the two, 16-delta options will be at strike prices further from the stock price than 30-delta options, as there's a lower chance for the stock price to reach further stock prices by expiration.
I hope this helps!
-Chris
projectoption my doubt is cleared now.Thanks a lot.
You're welcome!
@@projectfinance hi Chris, r u selling ic daily..I didn't understand that bit
I got a little confused when he was talking about the VIX. Because there’s a lot of emphasis on the individual volatility of the stocks when trading options. But he was talking about the overall volatility of the stock market I believe so that creates a question of what happens when the individual stockhas high volatility versus non-high volatility in the stock market and the individual volatility. This creates a lot of combinations? Like low volatility stock, low volatility stock market, high volatility stock versus high or low volatility stock market etc... I guess you can consider that an area of inquiry for the future options geeks.
He used the vix since the underlaying is spy, vix is constructed base on the implied volatility of the Spx options …
Hi Chris,
Thanks for the video! I may be missing something but the first table you show “iron condor be strangers by the numbers”, all of the strategies seem to have a negative expected value over the long run. This is found by taking the probability of profit times average profit minus the probability of loss times average loss. They all are negative. I’m wondering how the made money in the PL plot.
Thanks!
same doubt i have
Can you please do an updated version of this video for last 10 years in SPY. Also, please start making contents for Indian options data, options trading is growing rapidly and India is now one of the largest derivatives market.
Would be really nice to have a similar study of iron condors vs iron flies
Andre,
I agree. I will add that comparison to the list of topics to cover in future videos.
Daily selling?
Excellent, inforative video that gets right to the point.
thank you for the comment! I'm glad you found the video helpful.
My conclusions:
* Low VIX ==> Strangles, if you don't consider position sizing. Regardless of that last factor, it's clear that strangles perform better in low-VIX environments. So if you find yourself biased towards trading one for whatever reason, you can also factor in VIX as a positive or negative aspect to the trade.
* High VIX ==> 30/10 Iron Condors, almost no difference to low-VIX environment. Do note that very high VIX might have different effects on your trades; I have no experience yet with multi-leg options trading (hence watching these studies and whatnot first) but I bet that a few years of trading would make you feel the difference between 40 VIX and 20 VIX even though here they were undifferentiated. Another study by projectoption highlights how very high VIX can completely change Iron Condors and actually favor them if they are managed properly with stop losses and profit takers. Another aspect behind this is trading the legs at different points in time, rather than initiating the longs and shorts simultaneously, leaving a lot to be experimented as we take these findings as a basis point of knowledge and insight in our options trading.
Also, what someone else pointed out: it would be nice to see a study comparing two strats when taking into account capital allocation! The underlying thing you are testing then is cumulative P/L over drawdown, since less drawdown means you can leverage more (obviously with needed margins of safety as there will always be new, perhaps larger crashes and rallies in the future). In that case, the ratio itself is enough to give a fair indication.
Great videos, amazing content, looking forward to more!
Great …thank u Chris
How would be in 2020?
the picture should be vastly different with covered strangles
Definitely! Especially with the strong bull market period we've experienced over the past 10 years.
I can test the strategies and put together a video with the results.
-Chris
That was a damned good video!
Hi Chris. I can visualise 1SD(68%)& 2SD(95%) in terms of width(OTM) on bell curve. But when they say 16 delta, 30 delta - I cannot understand how much POP it stands. Is there a tutorial on that? Sorry am a noob so don't mind :)
Rajesh,
Great question and it's not obvious at first!
It depends on if you're selling one side or both sides.
If you just sell a call option with a delta of 16, the option has a 16% chance of expiring in-the-money, which means an 84% chance of expiring out-of-the-money. So, if you sell one side, the POP is 100 - delta (100 - 16 Delta = 84% chance of expiring OTM).
If you sell both sides, then you need to subtract both option deltas from 100. So, if you sell a 20-delta call and a 15-delta put, the POP estimation would be:
100 - 20 Delta - 15 Delta = 65% chance of expiring OTM.
Does this help?
Please let me know if you need additional explanations!
-Chris
Im currently looking at an active trade where the underlying is In my spread for a loss. But my delta is a 8.00. By my understand with this description my POP would be 92% but the trade expires in two days and is losing. Delta is confusing me to no end!
Excellent analytics!
Thank you
Thank you!
Very nice one
Thank you!
Would be interesting to throw in Iron Condors into the study with very near the money shorts.
Thanks for the suggestion. What delta for the shorts?
Also, why is the win rate of 16 delta strangle more than 68%? As delta also represents the probability of price crossing the strike price at expiry. So over the period time, if the probability principle is correct shouldn't win rate be close to 68%, unless we set some predetermined profit level which we have not done in this video.
1) The breakeven prices of a short strangle will be beyond the short strikes, which means the probability of the trade making money at all is higher than the probability of the trade expiring worthless (which is what delta estimates -- the probability of an option expiring in-the-money).
2) If we account for the fact that historically, on average, realized volatility is less than implied volatility, then we'd expect a 16-delta short strangle to expire worthless more than 68% of the time.
@@projectfinance beautiful
16/10 will need much less capital than others so roc will be in line not less
...and Tom aired a segment where he advised to sell straddles when IVR is above 80. :/
I'm more convinced now that TT is for people who love trading more than they love income..
Backtesting it from 2020 to 2023 results in a negative P/L !!! Backtesting can be very misleading😂
True! The market environment 2020-2023 has been far different than the majority of 2009-2020
The idea of 17.5 vix being high. Hilarious.
It really is crazy!
Bruh what is happening. What language is this 😂