I Tested the Tasty Trade Method & Why I Stopped Trading It
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.
Data for 45.75 DTE option
Data for 90.25 DTE option
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.
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.
Tasty Trade Method Experiment Update #1
Video Notes:
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.