OAP 067: The Stop Loss Myth – 10 Backtested Option Strategies Prove They Create More Losing Trades

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In most investing or online trading circles, it's common place to hear people tout the need for "stop loss" orders to theoretically protect your portfolio. And while there is no doubt that stop loss orders help mitigate large drawdowns from time to time, the question I never see asked is, "What am I giving up by implementing a stop loss order as part of my trading system?" You see, all too often traders and financial educators are quick to harp on the "need" or "requirement" for having continuous and always present stop loss orders in place.

Still, we all accept this golden rule as an undeniable investing truth, because, well, it's always been something you're told to use. Today, I'll challenge this long-standing requirement for stop loss orders when trading option strangles. Until now, nobody has built a system to backtest this variable on the scale and scope that we have here at Option Alpha. Sure, you've likely seen one-off backtesting research segments elsewhere, but nothing as specific and targetted as what we've created.

In today's show, you'll discover how one simple tweak to the way you trade options generates average annual returns that are 87% higher, win rates that are 2X higher, all while making fewer trades and spending less on commission costs. Sounds pretty far-fetched, doesn't it? Well, it's not, it's just a small sample of the backtesting results we've been compiling over the last year that can help you make smarter, more profitable trades starting today.

SPY Short Strangle Strategies:

1. A 10 Day Expiration Cycle.

  • Delta set at 10, giving an 80-90% chance of success, not including the credit received.
  • Profit target set at 50%, closed out once 50% was reached.
  • Did not use IVR filters for any of the strategies.

First strategy: Tested and exit stop-loss at 300% increase in premium. Ex: if you took in a premium of $1, would only buy it back once it has gone up by 3X.

Second strategy: No stop-loss, no matter what happens. Would go all the way to expiration, win, lose or draw.


  • At the end of the cycle, the return on doing the short strangle without the stop-loss was 6,349%. Return with the 3X stop-loss was 4,420%, almost a 2,000% increase in your return by not having a stop-loss in place.
  • Win rates for the stop-loss were 85.57% on the trades. Win rate for not having a stop-loss was 88.42%.
  • Maximum drawdown without a stop-loss was 4.9%. With a stop-loss, the maximum drawdown was 4.47%.

2. 30 Day Expiration time, on average.

  • Delta set at 15, with a 50% profit target.
  • Stop-loss set at 25%, a tight stop-loss.


  • For the 30 days, 15 delta, 50% profit target, no stop-loss, no IVR filter, the return was 3,140% at the end of the cycle.
  • With a tight stop-loss, profitability went down to 1,489% over the period. The stop-loss creates a 2X difference in return.
  • Win rate for stop-loss is decreased to 56.71% for this trading strategy. Without the stop-loss, the win rate was 90.40%.
  • Maximum drawdown was 12.96% without a stop-loss in place. With the tight stop-losses added in, the drawdown was 5.92%.

3. 30 Day Expiration Cycle.

  • Delta set to 20 on either side, profit target was taken at 25%.
  • Kept tight stop-loss at 25%


  • The strategy with stop-loss made 760%, and the strategy without the stop-loss in place generated 1,533% over the period.
  • Win rate when taking profits early with stop-loss was 66.51% versus no stop-loss having a win rate of 92.94%.
  • Maximum drawdown without a stop-loss was 16.66%, and with a stop-loss in place the maximum drawdown as 6.86%.

4. 50 Day Expiration Cycle.

  • Deltas set at 30 on each side, and profit target is reset to 50%.
  • Stop-loss set at 75%, no IVR filter.


  • The strategy without the stop-loss generated 1,042% return over the testing period. The strategy with the stop-loss generated 464% over the course of the period, by far the lowest performing strategy of all tests.
  • Win rate with a wider stop-loss was 65.91%, and without the stop-loss, the win rate was 74.36%.
  • Saw a much bigger drawdown when there was no stop-loss in place. The biggest drawdown was 21.99%. With a stop-loss in place, your maximum drawdown was 13.3%.

5. 70 Day Expiration Cycle.

  • Deltas were again set at 30, but no profit target was set in order to focus in on the stop-loss.
  • The exit stop-loss was set at 100% or doubling the premium received.


  • At the end of the cycle with a stop-loss in place, the return was 1,413%. Without a stop-loss in place, the return was 1,849%.
  • The win rate was almost identical in both cases, 69.57% and 69.77%.
  • The maximum drawdown with a stop-loss was 23.69%. Without the stop-loss, the maximum drawdown was 14.8%. The stop-loss created a lot more drawdowns that lasted for a longer period of time.


  1. There were fewer trades when there was no stop-loss in place, which increases profitability.
  2. In almost every case, there was a higher drawdown when there was no stop-loss in place.
  3. The average in annual return was 87% higher the entire period when there is no stop-loss in place.
  4. When there was no stop-loss in place, there was a higher win rate in every situation that was tested.

Option Alpha Podcast Show Notes[FREE Download] Podcast Show Notes & Transcript PDF: No time to read the show notes right now? We've made it incredibly easy for you to save time by giving you instant access to the complete digital version of today's show. Click Here to Download Your FREE Copy ?

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.

Option Trader Q&A w/ Devin Sandler

Trader Q&A is our favorite segment of the show because we get to hear from one of our community members and help answer their questions live on the air. This week's question comes from Devin who asks:

I have been using mostly iron condor 2 strategies. When looking at the portfolio beta weighted analysis, it suggests that I get a decent profit in the middle of the range with breakeven at around 201 and 227 on the SPY. There is still substantial tail risk outside of these boundaries, however. Does it make sense to consider buying one SPY call at 220 and then put another SPY put at 209 to protect against the tail risk? When it is simulated, the maximum profit drops. But would then have pretty decent profit anywhere along the SPY price curve without using too much capital. Right now it would cost $140 for the two puts together. Does this strategy make sense? Or am I missing something?

Remember, if you’d like to get your question answered here on the podcast or LIVE on Facebook & Periscope, head over to OptionAlpha.com/ASK and click the big red record button in the middle of the screen and leave me a private voicemail. There’s no software to download or install and it’s incredibly easy.

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.

Thank You for Listening!

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About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.