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Consistent income trading options: Strangles vs. straddles with low IV rank

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In our quest to understand trading options for income, we often wonder which strategy works best in a low IV (implied volatility) environment: selling a strangle (short strangle) vs. buying a straddle (long straddle).

A short Strangle is an option strategy in which both an OTM (out of the money) Put and OTM Call option are sold within the same option chain. A short Strangle brings in premium; hence a credit to your account. This strategy has the following Greeks: Delta neutral; positive Theta (time decay benefits this strategy); negative Vega (reduction in IV benefits this strategy).

A long Straddle is an option strategy in which both an ATM Put and an ATM Call are bought within the same option chain; in fact, both the Put and Call are at the same strike price. A long Straddle requires payment of the premium; hence a debit to your account. This strategy has the following Greeks: Delta neutral; negative Theta (time decay hurts this strategy); positive Vega (increase in IV benefits this strategy).

Tasty Trade recently tested the short Strangle vs. the long Straddle for low IV environments only (where IV Rank is less than 25). The test period was over 5-years using the following underlying ETFs: EWW, IWM, SPY, and TLT. The approach was to sell a 1 SD (standard deviation) Strangle and buy an ATM Straddle when IV Rank was below 25 using a monthly option with close to 45 DTE (days till expiration), and holding to expiration.

The results: the Long ATM Straddle lost money with a P&L of -$3,792, 40.4% winners, and a max loss of -$645; the short 1 SD Strangle made money with a P&L of $2,559, 79.8% winners, and a max loss of -$1,110.

In conclusion, even in low IV environments selling premium (short Strangles, credit spreads, Iron Condors) is an effective strategy. Using the Monthly and selecting only IV Ranks below 25 limited the number of trades to 109 (out of a possible 240 (60 x 4), or around 45%). Had the Weekly been selected, then the number of trades would be approximately four-fold, or around 436 trades, and (per our own analysis) the total P&L for the short Strangles would improve dramatically.

If you would like to learn more about options, and how to generate consistent weekly income trading options, go to Options Annex.



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