How to Make Money Selling Strangles | Options Trading Study

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Selling strangles each month on the S&P 500 is one strategy that can potentially generate monthly income for high-risk options traders.

We ran a 10-year backtest of selling strangles on the S&P 500 to determine whether taking profits or taking losses is more important when attempting to profit by selling strangles.

In this video, you’ll learn a common mistake new options traders make: not focusing on losses.

We’ll investigate whether focusing on taking short strangle profits or keeping losses small is more important for long-term profitability.

Study Methodology:
Underlying: S&P 500 ETF (SPY) from January 2007 to present.
Entry Dates: First trading day of each month.
Expiration Cycle: Standard expiration cycle in the following month (43-52 days to expiration).
Trade Setup: Sell a 16-delta call and a 16-delta put to create a one standard deviation short strangle.

Trade Management Approaches:
1. Close profitable trades for 50% of max profit
2. Close unprofitable trades when the loss equals the maximum profit potential (a -100% return on the trade).

Which approach made more money?

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Comments

projectoption says:

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Krishna Modak says:

I personally find iron condors a much better, less risk strategy to make consistent return on capital

Ankit Shah says:

Thanks Chris. Just to play a devil's advocate what would happen when you open with a huge gap down like say on 15th September 2008. Your losses might already be over your threshold and I guess you can't control it to be restricted to certain level.

Atanatari165 says:

If you take losses in a 2008 crash, you buy calls

boom1111111111111111 says:

what platform did you use for the BT?

rstallings69 says:

What happens if you put both those startegies in place at the same time by managing both profit and lisses?

Ken Davis says:

I would say that you can employ both strategies somewhat. Move the untested side closer either by rolling or just adding the option and close out the losing side early. It is important to do this before the strike is breached though.

msud14 says:

45 DTE 1SD strangles closed for 50% profit or before 15 DTE is what is often recommend.

Managing losses can be to unravel the losing side and double down on the winning side (as the underlying can in no way take out both strikes in the same expiry)

Finance Hardo says:

Why not do both

prashant says:

I am fully agree. It is tempting to book small early profit but that can be disastrous.

Namit Jain says:

Just what I was looking for. Thanks! Since keeping losses small is the key, will it be possible to show us the optimum loss level (100%, 150%, 200%, 250%, etc.) so that we don't risk closing our trade early rather than letting the probabilities work out. If possible, can you also add 2 standard deviations (2.5 deltas) because that's what I trade and they yield pretty good returns in some markets.

Juan Calmet says:

very good video

sam brown says:

This channel is just what I was looking for. subbed.

Michael Campbell says:

I'd like to see the curve where you close the trade at EITHER 50% profit, OR 100% loss (or expiration if neither happen).

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