The wonderful guys and gals of the tastytrade/dough support team answer an inconceivable amount of support emails, chat requests and phone calls each week. They work furiously to make sure all of our viewers/users are assisted with whatever questions they may have, but sometimes, when there are questions specifically related to some of the research we have been working on, we like to jump in and help wherever possible.
Today, we wanted to share with you some of the more popular questions that we get asked all of the, along with answers to each question.
1. “What do you mean when you say manage at 50%?”
Managing a winning trade once it is in play is an important aspect of the tastytrade way of trading. Whenever we place a trade, we usually do not let a trade go all the way until expiration if we can pull profits out before then. We manage our winners and typically like to manage them at about 50% max profit. This means that if we sell an option, we will try and take the trade off when it has captured 50% of the original premium we collected when we placed the trade.
For example - if we sell an iron condor for a $1.00 credit, then we have a maximum potential profit of $100 (per option contract) if the option expires out of the money. Therefore, we would look to exit the trade when the iron condor is trading for around $0.50, thus giving us $50 in profit.
Unless otherwise stated, this is what we mean when we say manage a trade at 50%.
2. “You recently did a study where you looked at capping losses on strangles at 2x credit received. what does that mean?”
Recently we have been doing some studies where we cap the loss on undefined risk trades. One way we set the loss limit, is by using a multiplier of the potential loss, and multiplying it by the amount of credit (premium) that we took in. As a method of keeping it mechanical, we set the maximum loss to a multiplier of the premium we received for the trade.
i.e. If we sell a strangle for a $2.00 credit, the max profit on one contract, is $200. Let's say we wanted to cap the loss on this trade by 2x the credit received, we would multiply the premium by -2. This means that an exit point set at 2x max profit, would be -$400. In other words, if we originally sold the strangle for $2.00, then the exit price would have to be after incurring -$4.00 in loss. Therefore, in order to meet the criteria for getting out of a trade at 2x credit received, we would have to exit the strangle when it is trading for $6.00.
3. “What do you mean by ‘average days held’ and ‘average P/L per day’?”
Both "average days held" and "average P/L per day" are some common metrics you will hear about in many of our segments that analyze premium selling strategies.
“Average days held” refers to how long (on average), any given trade was held during a back test (using historical data to see how certain scenarios would have played out).
Imagine we are back testing a short strangle that is 1 standard deviation wide, with approximately 45 days until expiration. This study would yield two numbers for average days held - one for managing trades that reach 50% max profit, and one for holding the trade through expiration. They both represent the same metric, even though the numbers are different.
Another metric that we talk about frequently is "average P/L per day." Average P/L per day is simply the profit or loss, divided by the number of days that we stayed in a trade. We then take the average of these numbers for all trades in a study to get an overall average study P/L.
4. “Can I have access to your data so that I can run some tests myself?”
Unfortunately, we are not able to give out access to our proprietary database.
That being said, we always welcome study ideas from viewers! We read through every suggestion that gets sent our way and take them into consideration when we are planning future studies.
If a particular study piques our interest (and can be applicable to a large number of our viewers), then we will definitely look further into it.
Keep your eyes on the blog for more FAQs from the research team!
Still have some burning options trading questions for the tastytrade Research Team? Shoot them an email at firstname.lastname@example.org!