Tasty Trade Method Experiments & Why I Stopped Trading It

You have probably heard it before. 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 solidifies that claim. The key here is the Average P/L per day. 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

Table of Contents

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.

My Initial Trading Plan

However, after testing it out with 45 DTE on a bunch of earnings trades and got 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 Tastytrade 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 adjusting my positions often. With 45 DTE options, the safety margin is much smaller compare to longer DET options, so a relatively small move in the underlying stock could easily cause my 45 DTE position to become a loser. By using the longer DTE options, it not only gives a much wider out of the money range, 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. Sound like 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 seems 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.

Below is the trading progress so far.

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.

Short Strangle Summary Table

Correlation Charts

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 winning ration goes. Since the strategy requires 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 earning. 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 draw down. 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

Tasty Trade Method Experiment Update #4

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Tony

I have been trading options since 2010 and have been testing and experimenting with various trading styles. Fundamental Analysis based, Technical Analysis based, Trend Following, Day Trading, Swing Trading, etc.

My primary option trading strategies incorporate volatility and I am constantly experimenting with various trading strategies to improve my PNL.

I hold two Master’s degrees (MSc and MBA) with career experience as a cancer research scientist and a digital marketer.