We Examined 8 Short Strangles for Returns & Margin Requirements

This podcast examines eight different short strangles across a mix of ETFs and individual stocks to determine which option trades have the best pricing on a relative basis, given that every short strangle we analyzed had the same 70% probability of success. Learn what the backtests teach us about returns and margin requirements.
We Examined 8 Short Strangles for Returns & Margin Requirements
Kirk Du Plessis
Dec 5, 2016

What does great pricing look like when trading short strangles? Is it collecting a certain raw dollar amount? Or a certain percentage of the stock price? Without a doubt, these are tough questions to answer for newbie options traders and hard to answer without some context. And while comparing pricing on different risk defined option trades, like credit spreads and iron condors, is pretty straight-forward and easy, it can become difficult to recognize great pricing with undefined risk option strategies like short strangles.

In today's podcast, I examined eight different short strangles across a mix of ETFs and individual stocks. I recorded everything from the current stock price and implied volatility ranking to the premium collected and the margin required for each one lot strangle. My goal? Discover which option trades had the best pricing on a relative basis given that every short strangle we analyzed had the same 70% probability of success

Key Points from Today's Show:

  • With short strangles and straddles, it is much harder to determine what type of premium you should be collecting.
  • A lot easier to determine a good price with a credit spread, since you know the risk.
  • Need to look at other straddle positions with similar criteria to get a sense of what straddle pricing is like.
  • Have to determine how much credit you can take in versus how much margin is required to hold the position.
  • Your trade entry and position size is based on the initial margin requirement.
  • Looking at straddles based on margin and return creates a valid comparison strategy to compare several different securities.

Short Strangle Analysis

*Compared a combination of ETF's and stocks, both high and low volatility securities.

*Each trade has a 1 standard deviation, 70% probability of success, 15 Delta on each side.

1. XLU Utilities ETF

  • Implied Volatility ranking (IV) at 58.
  • ETF price is at $48.
  • Can collect $58 in premium per strangle sold.
  • Margin requirement is $722 per strangle.
  • Return on capital of 8.03%, based on margin requirement.

2. SPY ETF

  • Implied Volatility ranking (IV) at 46.
  • ETF price is at $211.
  • Can collect $192 in premium per strangle sold.
  • Margin requirement is $3,290 per strangle.
  • Return on capital of 5.83%.

3. EWW, Mexico ETF

  • Implied Volatility ranking (IV) at 100.
  • ETF price is at $49.
  • Can collect $93 in premium per strangle sold.
  • Margin requirement is $495 per strangle.
  • Return on capital of 18.78%

*Higher return on capital based on higher IV and higher option pricing.

4. GDX, Gold Miner's ETF.

  • Implied Volatility ranking (IV) at 40.
  • ETF price is at $26.
  • Can collect $68 in premium per strangle sold.
  • Margin requirement is $560 per strangle.
  • Return on capital of 12.14%.

5. Tesla Stock (TSLA).

  • Implied Volatility ranking (IV) at 15.
  • Stock price is at $192.
  • Can collect $420 in premium per strangle sold.
  • Margin requirement is $2,920 per strangle.
  • Return on capital of 14.38%.

*Naturally has more volatility and better option pricing, making it a good trading vehicle.

6. Starbucks Stock (SBUX).

  • Implied Volatility ranking (IV) at 63.
  • Stock price is at $53.
  • Can collect $54 in premium per strangle sold.
  • Margin requirement is $585 per strangle.
  • Return on capital of 9.23%.

7. Twitter Stock (TWTR)

  • Implied Volatility ranking (IV) at 26.
  • Stock price is at $18.
  • Can collect $65 in premium per strangle sold.
  • Margin requirement is $430 per strangle.
  • Return on capital of 15.11%.

*Naturally has a lot of volatility built in, which compensates for the margin requirement.

8. JPMorgan Chase & Co Stock (JPM)

  • Implied Volatility ranking (IV) at 22.
  • Stock price is at $69.
  • Can collect $88 in premium per strangle sold.
  • Margin requirement is $1,000 per strangle.
  • Return on capital of 8.8%.

*Naturally lower IV built in, so lower compensation than Tesla and Twitter.

Key Points:

  • When looking at different short strangles to determine good pricing, you have to look at the variables.
  • Compare relative pricing and returns of ETFs, stocks, and different relative names in the industry.
  • Do not have to go with the highest return, but usually, the highest return on capital ends up also being the best possible trading opportunity.
  • Analysis of these strangles highlights the vast difference in your return on capital and ability to make money on some of these trades.

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