/ES 11/24 Short Strangle

Let’s track a short strangle…

Yesterday (10/3) during the market downturn, I opened a short strangle on /ES (emini S&P500 futures) 11/24 expiration (52DTE). IV Rank was around 33.

Short the 4000 Put for 39 points (+$1950). Short the 4500 Call for 18 points (+$900). These were around .16 delta.
Total credit received 57 points ($2850).
Buying power reduction (margin collateral) was around $12,000.

I hope to close the trade for a 50% profit target. Buy-to-close for 28.5 points ($1425).

Current snapshot of the trade:

Why initiate a short option trade so far out in time (52 days) when the greatest theta decay happens close to expiration?

I watched this video earlier this week that convinced me that selling otm options around 45 days is optimal.

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At close Friday (10/6), /ES is sitting at 4345.37. IV Rank has dropped from 33 to 24. The trade can be closed for 50.5 credits giving 6.5 of unrealized profit from the initial 57 credits collected at open.

Looking at the greeks for the position


The rip-yer-face-off-rally from today put some pressure on the call leg. The strangle is now slightly bearish with -.11∆. The decrease in IV has been the main contributor to the price decrease of the position (Vega = -8.395).

I may adjust the ∆ next week by moving up the put leg. Depends on what price action manifests.

Here’s a great video on strangle management by Dr. Jim:

The bull rally from Friday continues.

In order to cut down on some of the building negative delta exposure and pressure on the call side, I rolled up the short put leg.

Bought to close the 4000 Put for -12.25 credits.
Sold to open the 4090 Put for +18.25 credits.
This gives me an additional +6 credits to add to the initial +57 credits received.
Total credits received = +63 credits.

My goal remains to close the trade for +28.5 gain. The updated target closing price is 63 - 28.5 = 34.5 handles.

The position can currently be closed for -58 credits.

Current Delta: -0.18
Theta = +1.485

Looking at Theta. The Theta value is expressed in /ES handles. 1 /ES handle = $50 USD. The position is making $74.25 per day. Theta works 7 days a week. If I maintain such a position for 365 days, that equates to a total capture of $27,101.25. All this for $12,0000 margin maintenance. But a 25% capture rate is a more realistic expectation of theta exposure, so $6775.31 return for doing 16delta 52DTE short strangles on /ES.

Market pulled back on Thursday and continued downward Friday afternoon.

/ES is sitting at an IV Rank of 36.8 with an IV of 19.1%.
The position was initially open with IVR around 33.

I took the opportunity of Friday afternoon to roll the short put up to balance out the overall delta of the position. Rolling into strength as they would say.

Bought to close the 4090 Put for -29.25.
Sold to open the 4130 Put for +34.50.
This gives me an additional 5.25 credits to add to the +63 credits already banked.
Total credits received = +68.25 (excluding commissions)

Looking at the position on my platform (I analyze option trades on Tastytrade but execute the trades at Interactive Brokers (using IBKR Mobile):

Not as pretty nor as intuitive as Tastytrade. You can see the overall position and the individual legs. The position can be closed by buying it back for around -61.50 credits.

Looking at the greeks of the overall position:


Short strangle options are long theta, short vega, and short gamma.

Since last week, theta has grown from 1.341 to 1.688. The position is making +$84.40/day for me from theta decay. Theta decay works in favor for the short option seller and works against the long option buyer.

Vega has increased in magnitude from -8.395 to -8.847. Short option sellers benefit the most when selling options during times of heightened volatility. After a vol spike, the mean reversion of volatility works in our favor. The biggest mistake beginner option sellers make is selling when vol is low. Fighting against ever increasing volatility is a tough battle. Hence, the importance of selling when IV Rank is high.

Negative gamma has also increased in magnitude from -0.002 to -0.003. Gamma works in favor of the long option buyer but works against the seller. I want the underlying to be still and behave. The best way to minimize gamma exposure is to keep the position delta neutral.

Nothing left to do here. Lets see what the market will bring next week.

I’m going to turn this post into a short strangle journal with resources about short strangles and their management. This has been a very useful endeavour for myself.

The tasty guys answered a couple of questions yesterday about Short Strangle management.

How often to adjust the deltas?
Using shares to flatten the deltas in a strangle (delta hedging with static delta (stock)).

IMO, currently, the next hottest thing in retail options trading following trading “0DTE SPX” is trading short strangles.

I’m not a fan of “0DTE SPX” option trading as fighting the gamma explosion is very stressful. But I have done “1-3 DTE SPX” option selling profitably. But, that is still a stressful white-knuckle trading experience.

In today’s Market Measure, the team addressed the hot topic of how frequently should one recenter the delta’s of a short strangle. Tom Sosnoff personally does this on hyperactive level…multiple times per day for an imbalanced strangle. Looks like the data is showing it to be non-optimal.

On Friday (10/20), while the market was dropping, I rolled the call leg down from 4500 to 4450. This gave me an addition +7.2 in credits to add to the +68.25 credits already collected.

Net Credit Received = +68.25 + 7.2 = +75.45

Even with rising volatility, the position is still above water and can be closed for -72 handles.

Looking at the greeks for the short strangle:

There was a moment on Friday when the strangle was perfectly delta neutral (0.0), but as the market dropped further into the short put, the position became more and more delta positive. Rolling down the call leg added some negative delta ending the position with an overall delta exposure of (+0.167). Positive delta is a bullish stance, the market going up from here is the favorable move for this position.

Looking at vega. With volatility being bid up this past week, short vega is overriding positive theta. With a vega of -8.847, every +1% move in Implied Volatility (IV) will cost the position -8.847 handles.

Current IVR: 49.6
Current IV: 21.7%

Initial IVR: 33
Initial IV: 19%

Since inception, volatility has increased by +2.7 points (21.7 - 19).

If the market rebounds upward this week, there will be little to do in this position as volatility will usually decrease in an upward market.

If the market continues to drop further, I’ll continue to roll down the call side. I am also considering closing out the legs at breakeven and resetting the deltas. Effectively restarting the position back at delta neutral at a higher level of initial IV.

With options, there are options. 80% of profitable option trading comes from having a high probability entry. The other 80% of success comes from strategic management of the position. :smiley:


Another video for initiating a short option trade further out in time (45dte).

Had I stuck to the original strikes of this strangle and not done any rolls, I would have been able to exit today well above my profit target.

Knowing when to roll and when to hold 'em is a difficult call. I know from experience rolling can save a trade gone bad but being too aggressive can make the strangle too tight requiring more time to profitability.

A video on Why We Roll


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After seeing /ES futures gap down on re-opening at 6pm EST, I set a stop-limit order to exit this position around breakeven. This triggered a few hours ago taking me out of this position for -74.75 handles (-$3,737.50).

Total credits collected: +75.45 handles (+$3,772.50)
Commissions: -$14.20
PnL: +$20.80

Current IVR: 50.3
Current IV: 21.6%

Initial IVR: 33
Initial IV: 19%

I don’t know if the market is going to bounce back tomorrow or sink further into the hole but I do believe volatility is here for awhile and I live to fight another day.

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