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.
How do you know what good pricing is on a short strangle?
- 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.
- 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.
Free Options Trading Courses:
- Options Basics [20 Videos]: Whether you're a completely new trader or an experienced trader, you'll still need to master the basics. The goal of this section is to help lay the groundwork for your education with some simple, yet important lessons surrounding options.
- Finding & Placing Trades [26 Videos]: Successful options trading is 100% dependent on your ability to find and enter trades that give you an "edge" in the market. This module helps teach you how to scan properly for and select the best strategies to execute smarter option trades each day.
- Pricing & Volatility [12 Videos]: This module includes lessons on mastering implied volatility and premium pricing for specific strategies. We'll also look at IV relativeness and percentiles which help you determine the best strategy to use for each and every possible market setup.
- Neutral Options Strategies [7 Videos]: The beauty of options is that you can trade the market within a neutral range either up or down. You'll learn to love sideways and range bound markets because of the opportunity to build non-directional strategies that profit if the stock goes up, down or nowhere at all.
- Bullish Options Strategies [12 Videos]: Naturally everyone wants to make money when the market is heading higher. In this module, we'll show you how to create specific strategies that profit from up trending markets including low IV strategies like calendars, diagonals, covered calls and direction debit spreads.
- Options Expiration & Assignment [11 Videos]: Our goal is to make sure you understand the logistics of how each process works and the parties involved. If you don’t feel confident in the expiration processes or have questions that you just can't seem to get answered, then this section will help you.
- Portfolio Management [16 Videos]: When I say "portfolio management" some people automatically assume you need a Masters from MIT to understand the concept and strategies - that is NOT the case. And in this module, you'll see why managing your risk trading options is actually quite simple.
- Trade Adjustments/Hedges [15 Videos]: In this popular module, we'll give you concrete examples of how you can hedge different options strategies to both reduce potential losses and give yourself an opportunity to profit if things turn around. Plus, we'll help you create an alert system to save time and make it more automatic.
- Professional Trading [14 Videos]: Honestly, this module isn't just for professional traders; it's for anyone who wants to have eventually options replace some (or all) of their monthly income. Because the reality is that mindset is everything if you truly want to earn a living trading options.
PDF Guides & Checklists:
- The Ultimate Options Strategy Guide [90 Pages]: Our most popular PDF workbook with detailed options strategy pages categorized by market direction. Read the whole guide in less than 15 mins and have it forever to reference.
- Earnings Trading Guide [33 Pages]: The ultimate guide to earnings trades including the top things to look for when playing these one-day volatility events, expected move calculations, best strategies to use, adjustments, etc.
- Implied Volatility (IV) Percentile Rank [3 Pages]: A cool, simple visual tool to help you understand how we should be trading based on the current IV rank of any particular stock and the best strategies for each blocked section of IV.
- Guide to Trade Size & Allocation [8 Pages]: Helping you figure out exactly how to calculate new position size as well as how much you should be allocating to your each position based on your overall portfolio balance.
- When to Exit/Manage Trades [7 Pages]: Broken down by option strategy we'll give you concrete guidelines on the best exit points and prices for each trade type to maximize your win rate and profits long-term.
- 7-Step Trade Entry Checklist [10 Pages]: Our top 7 things you should be double-checking before you enter your next trading. This quick checklist will help keep you out of harms way by making sure you make smarter entries.
Real-Money, LIVE Trading:
- IWM Iron Butterfly (Closing Trade): Exiting this IWM iron butterfly options trade gave us a $1,100+ profit after pinning the stock price one day before expiration at the peak of our spread.
- CMG Iron Condor (Opening Trade): I just recorded my live trading platform (and real money account) as I walked through the process of entering a new iron condor trade in CMG stock. Inside you'll see me analyze, price and fill the trade in real-time.
- APC Strangle (Closing Trade): Took about $150 out of this small APC strangle trade even after the stock moved completely against our short call strikes this month. But as always, implied volatility always trumps direction and because IV went down, the value of this spread dropped more-so than the impact of the directional move higher.
- IYR Call Credit Spread (Adjusting Trade): This adjustment is good for 2 reasons. First, it reduces the overall risk in the trade if IYR continues to move higher. Second, it still leaves room for the stock to fall back down into our new profit window.
- XHB Straddle (Closing Trade): We were able to bank a $120 profit early in the March expiration cycle for our XHB straddle with the stock trading right in the middle of our expected range.
- AAPL Call Calendar (Opening Trade): Look behind the scenes as I use our new watchlist software to filter quickly and find this AAPL call calendar spread trade during overall low implied volatility in the market.
- COF Strangle (Adjusting Trade): Here I recorded my live trading screen (and real money account) showing you the entire thought process we used to make an adjustment to my current short strangle in COF to reduce risk.
- GDX Strangle (Opening Trade): With gold's high IV we are getting into a new strangle with a 70% chance of success and a decent credit for selling option premium.
- IBB Iron Condor (Closing Trade): Today we're exiting an iron condor we traded in IBB for a $142 profit. Inside you'll see me analyze the exit price and fill the trade in real-time.
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