Stop losses are a popular strategy used by traders to achieve better performance by closing out of a losing trade. But do they work?

tastytrade ran a study where we compared managing 16 delta strangles in SPY, 45 DTE at expiration and 1x-5x credit received losses.

We found that on average, stop losses hurt performance over the long run, because most of the trades you stopped out of eventually had a better P/L at expiration.

Tune in as Tom and Tony expand on this concept.

We often discuss beta, a measure of systematic risk for a portfolio or asset, but we rarely discuss alpha.

Alpha is another important metric that estimates the percent excess return on an investment relative to some benchmark (the S&P in our case).

Alpha is a great way to estimate how well a strategy is outperforming the market - today we investigate how well a portfolio of actively managed 16 Delta SPY strangles performs relative to major tech stocks using alpha and beta.

Potential return on capital tends to be highly positively correlated with implied volatility. This makes intuitive sense because options act as a form of insurance, and higher amounts of uncertainty (IV) tends to increase the demand for insurance as well as the max potential return on capital (ROC).

Our research suggests that you can achieve about 1.5x the average ROC trading in higher IV environments compared to lower IV ones.

Tune in as Tom and Tony walk through this in depth!

With the delta rebalance strategy when a leg becomes tested, we roll the entire position to the original trade's deltas. How has this strategy performed historically?

Ultimately, rebalancing a trade's delta produces a fair win rate with a shorter duration and cuts the largest loss in half. Also, our research indicated that 40% of the tested positions had a positive P/L when the leg became tested, making the case that rolling to re-establish the position is not as costly as once thought.

When picking a trade we typically consider the liquidity, recent price action, implied volatility, and potential market-moving catalysts of the underlyings.

While ETF implied volatility is typically lower than stock implied volatility, ETF implied volatility has been historically overstated more often than stocks. Also, tail risk and outlier moves are much more prevalent for stocks than ETFs.

Therefore, ETFs provide us with opportunity to trade with less tail risk.

Liquidity is extremely important to retail traders because it makes markets fair and efficient. Without liquidity, we would be paying far too much for our trades, making them infeasible.

IVV is a product similar to SPY with the only key difference being that IVV is very illiquid. By trading strangles in IVV, you give up almost 69% of your P/L to liquidity costs, vs less than 5% in SPY.

Liquidity can be the difference between a portfolio that does just ok, versus one that does great.

Tom, Tony and Anton look at how big of an account we need at most to conduct the strategies we do.

Earlier this week, we conducted a study to see what happens to the expected profit % of credit over different delta strangles.

It turned out that the larger delta strangles had a smaller hold % in terms of P/L but had larger raw P/L.

However, in high IV environments, we not only collect more credit, but we also see a larger % of that credit in our P/L on average compared to lower IV rank environments.

Why does managing positions earlier reduce portfolio volatility? Gamma risk is one answer. But to be more intuitive, we can look at how a stock moves over the course of a trade held to expiration versus how much a stock changes when the position is managed early. We find that the stock moves (on average) a lot less over a 22 day period than a 45 day period. This translates to lower portfolio volatility because you are less exposed to directional movements. Tune in as Tom and Tony expand on these takeaways.

Tom and Tony discuss how much profit you can expect to collect as % of credit for different delta strangles.