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How does maximizing occurrences level out risk in a portfolio? Maximizing the number of occurrences brings total results closer to what is expected statistically. This leads to greater consistency in both P/L and win rates. tastytrade explains
The chance of a complete reversal in the market after a 2% or greater daily move in either direction is just 1% (over 20 years). The chance of a reversal after a selloff is twice as likely as a reversal after a rally of the same size. Since the
Yesterday SPY dropped by roughly 3.8% and the VIX spiked by nearly 32%. However, when SPY dropped by 3.3% in late February, the VIX spiked by 47%. And when SPY dropped by 3.3% in early March, the VIX only jumped by 24%. Since IV tends to be hig
NASDAQ’s price and IV have become much less inversely correlated over the last three months...dropping from its long term correlation of -0.75 to a much weaker -0.42. Compared to the last ten years, the last three months have observed roughly t
Soon a selection of cryptocurrencies will be available on the tastyworks platform. Today we will dive into some statistics around one of the most popular cryptocurrencies, Bitcoin (BTC). Join Tom and Tony as they look at correlations, historica
Since this March, we have seen an increasing number of underlyings that have one-sided movement. So, we may wonder how often and how quickly should we expect to see reversals after these extreme moves? Tom and Tony examine a study done by the R
Contrary to popular belief, in AAPL’s case, stock splits do not at all provide any indication of future performance. Any post-split performance that deviates from the stock’s long term average cannot be immediately attributed to split unless th
Premium sellers prefer to collect theta, but with risk-defined trades, we can sometimes experience negative theta. Today, Tom and Tony discuss the theta of Iron Condors with various wings and its impact on P/L.
The day of the first outlier move experienced in the market, expect to have a loss that is roughly 15% of the total credit received of your strangle. However, on average, trades that had outlier price moves in the underlying were more profitabl
Compared to equities, options are subject to additional risk factors (e.g. IV, time decay) that add diversity to equity portfolios. However, in the long term how correlated are actively managed strategies with regards to one another? Today Tom
Because of the Central Limit Theorem, we have an answer of how much variability we can expect between our average P/L and the long term average based on our number of trades we made. The more trades we make, the more likely our average P/L is t
To approximate the probability of touch, simply multiply the probability of expiring ITM (the delta) by 2. This formula is based on when the trade expires. In today’s segment we will dig deeper and run a study to determine how many days on aver
Converting a naked option to a spread can reduce our Delta exposure. Does this reduced Delta exposure for spreads persist through the life of the trade? Today, Tom and Tony discuss the Delta exposure of the Spreads
One advantage of vertical spreads is they are smaller trades than naked positions and the narrower the spread the lower the buying power requirement. New traders may be misled by the lower buying power of tight vertical spreads relating to lowe
By taking an active approach to investing, you are able to learn about risk, opportunity, and decision making. Historically, the risk and returns from an actively managed portfolio have outperformed a simple buy and hold strategy. An active opt
Short premium positions are most profitable in high IV environments, and we trade IVR > 30 as a rule of thumb to ensure this. However, if IVR becomes skewed to the upside or downside, it might not accurately represent premium selling conditions
Some pairs have correlations that are mean reverting. In this study we focused on IWM-QQQ. If a pair has a mean reverting correlation, it does not mean that the pair price itself will mean revert. Trading a pair with high correlation means a pa
Like IV Rank, Skew Rank has the potential to determine the current situation for extremes. The question is, which one is more powerful? Today, Tom and Tony discuss the difference between using IVR and SKEW index.
Previous SPY conditional probability studies have shown that consecutive up-days are not strongly predictive of future up-days. However, what about conditional probability around volatility? Are consecutive IV up- or down-days predictive of fut
Iron condors with wider wings more closely represent strangles while lowering the buying power requirement. In the worst case, we can assume max loss for tight iron condors, does this hold true for wider spreads? Join Tom and Tony today as they
On Friday’s new Skinny on Quantitative Finance, we discussed how the tastytrade view of market efficiency is somewhere between the semi-strong and the strong version of the Efficient Market Hypothesis. In other words, risk and return for a part
A Stop Loss is a strategy meant to reduce risk in stock trading. But we know managing losses at a big target (like 2x of the original credit received) doesn’t seem to work well. What about incorporating a smaller target to further control the d
Options decay differently depending on whether they are at-the-money or out-of-the-money. ATM options decay faster after the 21 DTE mark, but they have more gamma risk, which we prefer to avoid. OTM options actually decay much less after the 21
When looking at tomorrow’s VIX prices given a certain VIX price today, we see two very important trends of tomorrow’s VIX price as today’s VIX price increases. In other words, when we start with a low VIX price today, tomorrow's VIX prices foll
Earnings plays, or trades placed one day prior to earnings, capitalize on a significant volatility contraction immediately following the release of an earnings report. However, is earnings IV expansion significant enough to make short premium t
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