I Tested the Tasty Trade Method & Why I Stopped Trading It

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What is the Tasty Trade Options Trading Method?

The Tasty Trade options trading method emphasizes the importance of trading high implied volatility and selling premium. This approach advocates for the selling of options because they believe that, over time, options tend to be overpriced.

So, by selling premium, traders can take advantage of the rapid time decay on an option’s price as it nears its expiration date. Furthermore, Tasty Trade encourages trading small and often to increase statistical chances of success, and managing winning trades early to minimize risk.

The typical options trading strategy to accomplish selling options premium is shorting Iron Condor, Strangle, or Straddle. 

45 Days to Expiration

You have probably heard it before if you have watched or followed Tasty Trade.

Trading options with 45 days to expiration (DTE) is the sweet spot. This is also what I have been doing since I learned that information from Tastytrade.com and Optionalpha.com.

The following slides taken from this Tastytrade.com video further solidify that claim. The key here is the “Average Profit and Loss (P/L) per trade”. The study was done based on exiting at 50% of the max profit (which was not made clear in the video but that’s what they normally do).

So, even though the overall profit was higher with the 90.25 DTE trades when looking at the daily P/L basis, 45.75 DTE makes a more significant profit.

45 DTE options

Data for 45.75 DTE option

90 DTE options

Data for 90.25 DTE option

IV rank for different DTE options

Sensitivity of Volatility

In addition to these data, another Tastytrade.com video shows that longer DTE options are less sensitive to changes in volatility.

This data also backs up the claim that 45 DTE options are the best ones to trade because it’s in a sweet spot in terms of volatility sensitivity.

Sensitivity of volatility

Summary sensitivity of volatility

My Initial Trading Plan

I followed their recommendations by trading 45 DTE options initially.

However, after testing it out with 45 DTE on a bunch of earnings trades and getting burned several times, I started to think what if I extend the timeline of the options? In addition to volatility, what if I also take advantage of time decay more?

One thing that got me thinking was that what if I exit the position at 35% max profit rather than 50% like what the Tastytrade method does?

Since the premium I would get is much higher with longer DTE options, exiting at 35% max profit could potentially be somewhat close to 50% max profit of shorter DTE options.

Also, the studies done by Tastytrades are on indexes but Vega could vary widely from stock to stock. So what if I focus on stocks that have high Implied volatility and high Vega?

The reason for this is I am not an active trader so I don’t want to actively adjust my positions often. With 45 DTE options, the safety margin is much smaller compared to longer DET options, so a relatively small move in the underlying stock could easily cause my 45 DTE position to become a loser.

Using the longer DTE options, not only gives a much wider out-of-the-money range, but I could also keep the position open and wait for it to come back without the need of checking on it too often. While I am waiting, the time decay would also be working in my favor. This sounds like a Win Win.

As I mentioned in the SPX Iron Condor Strategy post, based on the small-scale testing showcased in that post, trading options with 100 days to expiration seem to be the best choice in terms of benefiting from time decay. So, I decided to look for around 100 DTE options where possible.

In case you are not familiar with selling strangles, it is a high volatility options trading strategy and essentially the same as selling an Iron Condor with unlimited risk. It sounds dangerous but in reality, the risk is within an expected range when executed correctly.

The initial result of trading longer DTE options is shown below.

Long ETD options trade 8.4.2017

Tasty Trade Method Experiment Update #1

Video Notes:

8.9.2017

https://www.optionsplaybook.com/options-introduction/option-greeks/

Tasty Trade Method Experiment Update #2

It has been almost 2 months since I started testing to sell strangle with longer days to expiration options.

Now that I have some data, I decided to do a correlation study to see if my hypothesis was correct.

The idea was to trade long days to expiration options with high Vega and Implied volatility. Based on the results and the correlation study, it seems high Vega and high volatility do seem to help the winning ratio.

For more details please watch the following video.

Short Strangle Summary Table

Strangle trade update 8.25.2017

Correlation Charts

correlation study 8.25.2017

Tasty Trade Method Experiment Update #3

It has been almost 4 months since I started this strategy and as of now, it is looking promising as far as the winning ratio goes. Since the strategy requires a high IV percentile, most of the trading activities happen around earning seasons.

The strategy is to get out as soon as one of the following criteria is met.

  • When the target ROI is met – 35% of the maximum return.
  • When the IV drops after the earnings. Even if the target ROI (35% of the maximum return) is not met.
  • When there is a substantial positive ROI even if the IV has no change.
  • When the market condition changes that would change the outlook of the return.

The biggest concern I have right now is the magnitude of the drawdown. As you will see from the data, the losing trades have very large negative PNL. This is because the losing trades are left alone until expiration to give it more time to recover, as long as it is within a reasonable losing range.

As you can see there are some trades left alone and the options will expire on Jan 18th, 2018. So we will find out if indeed this strategy works as we get closer to that time.

For more details please watch the following video.

Correlation Studies

Correlation study short strangle with longer DTE options 10.29.2017

Tasty Trade Method Experiment Update #4

Conclusion

While the winning ratio of 70% was achieved by trading the Tasty Trade method, ROI in the end was negative.

The negative return does not necessarily mean the Tasty Trade method doesn’t work, because the fact that I achieved close to the win rate that they presented, shows it is a good method in theory.

However, just because it looks good on paper, does not necessarily mean it would work out in practice. This was especially true when a method does not match one’s personality.

In the end, I decided to move away from the Tasty Trade method, not just because of the negative ROI outcome, but also because it did not match the amount of time I wanted to spend managing trades.

SPX Iron Condor Strategy

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While doing some research on how to sell Iron Condor in a low volatility environment, I came across to a video that talks about time decay made by Tastytrade.

The image below is taken from the video and it shows Theta (time decay) against Days to Expiration (DTE).

When it’s 75 DTE, 90% Out of the Money (OTM) trade has about 1.25 Theta, 70% OTM trade has 2.25 Theta, and At the Money (ATM) trade has 2.75 Theta.

Higher the Theta, faster the time value decay. So the reason TastyTrade is an advocate of trading 45 DTE options, is because Theta gets a little boost around that point.

However, what I noticed is the rate of decay for longer DTE trades. Why not trade 75 DTE options and get out around 30 days to expiration? The trade duration would be around the same of about 30 days. So I decided to conduct an experiment with SPX.

Theta and days to expiration

SPX Iron Condor Trade Setup

The key idea of this trade setup is to benefit from the time value. The focus will be options with 45 DTE and longer up to 140 DTE. We will sell delta 25-20 on the Call side and sell delta 20-15 on the Put side to create an Iron Condor.

Based on my initial observation, increase in volatility has a very little effect on the value of these long time horizon options. In other words we will not time the purchase based on Implied Volatility (IV). Even if the volatility is low, we will still go ahead and sell the options.

The table below summarizes the options traded.

SPX 2017 Jun - Sep options

The Initial Results

June options (less than 60 days to expiration)

In this experiment, I sold two Jun expiration SPX Iron Condor positions. One with 56 days to expiration and the other 29 days.

SPX Jun

The result was terrible despite I got into the positions at 30% IV, which is considered pretty high these days as most of the time it is around 10% or less. Another potential reason for the lost was I set the exit point at 50%. What I realized was that even if I exit at only 35% of the maximum profit, I could still make almost 20% return of the money risked for the trade (shown in the “Lose” column, $960 and $990).

Overall, short duration trade is not worth the risk considering even when setting up the trade with high IV % and low delta, there just isn’t enough room for errors when the market is trending.

July options (less than 80 days to expiration)

When I increased the time to expiration by selling July expiration SPX Iron Condor, the result was much better. I actually adjusted the exit at 25% of the maximum profit because I did not want to repeat what I did with the June options.

The profit was only about 10% return of the money risked but considering the trade duration was about 50 days, when annualized it, 365 days /50 days =7 times.

In other words, I could potentially repeat this 7 times and make 10% return of the money risked each time, so 70% return annualized if no lost was encountered.

August options (less than 110 days to expiration)

This strategy seems promising as I managed to get out one position at 35% of maximum return after about 60 days of trade duration. This translates to about 20% return of the money risked. When looking at PNL / day, it has 6.17, which is much higher than what I got with July options.

When annualize it, 365 days / 60 days = 6 time. So if I manage to close the position every time at 20% return of the money risked, 6 x 20% = 120% annual return if no lost was encountered.

Considering the other position is still open, it could potentially take more than 60 days to close, but even if I manage to only trade 4 times in a year, 4 x 20% is still 80% return. Better than the July options trade.

Aug 2017 options

September options (less than 140 days to expiration)

I was positively surprised at the results. I actually managed to close two positions at around 60 days or less at 35% maximum profit, despite that these options have much more time value left.

It clearly show the IV% is irrelevant when dealing with a longer duration options. What we are selling is almost solely time value. However, what I like about this strategy is the safety. By going out more with time duration, I managed to get options that are far out of money with the same delta number (see the summary table of the SPX options traded above).

Since I still have two options open, the trade duration may be longer than what I would like. Also the return is less than 20% of the money risked. Assuming I could only do such trade for only 4 times a year, 4 x 15% = 60%.

Sep 2017 SPX options

 

Conclusion

Based on the results, it seems trading options with about 100 days to expiration could be a good strategy. We essentially capture the fast rate of time decay up till around 40 days to expiration.

This would be an ideal strategy for IRA accounts due its limited margin requirements. If managed correctly, it should give a pretty good annualized return.

 

Can I Sell Iron Condor in a Low Implied Volatility Environment?

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I know there are people out there who manage to make a consistent 20% return by just simply selling options on major indexes such as SPX and/or SPY continuously with the Iron Condor strategy.

One question I had was about Implied Volatility. Would such trades still work even in the low IV environment? Logically, it should, right? Otherwise, these people who are doing it wouldn’t be able to open such a large number of trades and generate consistent income.

What is the Iron Condor Options Trading Strategy?

In case you are not familiar with it, the Iron Condor is a popular options trading strategy that is designed to profit from a neutral market environment. It involves selling both a call and a put credit spread on the same underlying asset, with limited risk and potential for profit.

Let’s consider an example to understand how the Iron Condor strategy could work in a low implied volatility environment. Assume an investor sold an Iron Condor on SPX when it was trading at 3000. They might sell a 3100 call and buy a 3120 call to create a call credit spread, and then sell a 2900 put and buy a 2880 put to create a put credit spread, both expiring in 30 days.

The total premium collected might be around $200 for this Iron Condor. Even in a low IV environment, as long as SPX stays between 2900 and 3100 at expiration, the investor keeps the entire premium. Thus, even in a low volatility scenario, Iron Condors can still be profitable if the underlying asset price remains within the bounds of the sold strikes at expiry.

Why Concerned about Selling an Iron Condor in a Low Implied Volatility Environment?

The concern about selling Iron Condors in a low implied volatility (IV) environment stems from the nature of options pricing. In the world of options trading, IV is a key component. It represents the market’s expectations of future volatility, and it directly impacts the price of an option. When IV is low, it means that market expectations for volatility are relatively subdued. In this context, options premiums are generally lower.

The Iron Condor strategy, remember, involves selling options to collect a premium. In a low IV environment, the premiums collected from selling these options are likely to be smaller compared to a higher IV environment. This reduces the potential profit from an Iron Condor.

At the same time, the risk remains unchanged since the maximum possible loss is the difference between the strikes minus the premium received. As such, the risk-reward ratio may not be as favorable in a low IV environment.

Additionally, low IV environments could potentially indicate upcoming periods of high volatility. If the volatility increases sharply after establishing an Iron Condor, the position could quickly turn against the trader, leading to losses. There’s also the fact that adjustments, which are a critical part of Iron Condor management, could be more costly in a low IV environment.

So while it’s certainly possible to profit from Iron Condors in a low IV environment, such circumstances demand careful management and an understanding of the associated risks.

A Real-Life Example and a Couple of Studies on Trading Iron Condor in Low IV Environment

Below are three pieces of encouraging information to support the statement that selling Iron Condor in a low-volatility environment is indeed doable.

1) Cameron Skinner

I came across his story when listening to this podcast by Option Alpha, Cameron Skinner has managed to earn 22% annually by selling options every day.

He basically sells SPX contracts every day and closes SPX contracts every day based on the date of expiration. For example, he would sell 90 days to expiration Iron Condor SPX contract and close it down after 30 days.

2) A backtest study comparing Iron Condor to Strangle

I dug a little deeper and found a couple of videos. The first one is shown below was found on Youtube. The main focus of the video was to compare Iron Condor to Strangles, but the take-home message for me was that Implied Volatility did not matter that much when looking at a long time horizon.

This study included 2008 and 2009 data so there was a huge jump in volatility around that time. As a result, the test indicated that trades placed on lower IV performed better, which could be somewhat misleading since it was a black swan event. (NOTE: the study used VIX 17.5% as the cut-off. Higher than VIX 17.5% was considered high, and below that it was considered low).

However, the take-home message was that even including such a black swan event, selling Iron Condor works in both high and low-IV environments.

It is important to point out that the time to expiration for the options used in the study was 60 days.

3) A Tastytrade.com video

The other video I found was on Tastytrade.com and it talks about how to use Iron Condor in IRA accounts because of margin limitations in those types of accounts. The main focus of the video was to compare unmanaged trades (let it expire) or exiting at 50% of max profit.

The video indicates exiting early seems to yield a higher Profit and Loss number (PNL).

They also compared trading high IV Rank and low IV Rank. As it turned out, high IV Rank trades had better results in terms of PNL. It is important to note backtesting of these options trades was based on 45 days to expiration.

Conclusion

Based on these findings I would say selling Iron condor in a low IV environment works, at least with SPX. I am going to set up a real life trading experiment to see if this conclusion lives up to it.