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Market-Measures-What-to-Expect-when-Trading-slides EV

The document discusses expectancy when trading options strategies. It analyzes short put and strangle strategies on SPY, QQQ, IWM and GLD from 2005-2021. Short puts had the strongest performance and highest expectancy. Expectancy per dollar of risk is a better metric than raw expectancy. Expectancy varies across underlying assets and is lowest for more volatile assets like QQQ despite strategy. The key is having positive expectancy over many trades.

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kuky6549369
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59 views9 pages

Market-Measures-What-to-Expect-when-Trading-slides EV

The document discusses expectancy when trading options strategies. It analyzes short put and strangle strategies on SPY, QQQ, IWM and GLD from 2005-2021. Short puts had the strongest performance and highest expectancy. Expectancy per dollar of risk is a better metric than raw expectancy. Expectancy varies across underlying assets and is lowest for more volatile assets like QQQ despite strategy. The key is having positive expectancy over many trades.

Uploaded by

kuky6549369
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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What to Expect when Trading

What to Expect when Trading 1 of 7

● We focus many of our studies on probability of profit


(POP), the average profit, and the risk associated with
trading short options.
● Risk, return, and probability are inherently related,
meaning that you cannot have high probability, high
returns, and limited risk.
● This is best seen when looking at expectancy, so let’s
take a look at some popular tasty strategies to see what
to expect when trading.
What to Expect when Trading 2 of 7

● Expectancy helps us to understand how our winners,


losers, and probabilities relate to each other over the long
term.
● The calculation for expectancy is:

Expectancy = (Win % x Average Win Size) + (Loss % x


Average Loss Size)
What to Expect when Trading 3 of 7

STUDY:
● 2005 to 2021
● SPY, QQQ, IWM, GLD
○ 16∆ and 30∆ strangles and puts, 16∆ calls
○ 45 DTE, Managed at 21 DTE
● Observed:
○ Win Rate
○ Average Win Size
○ Loss Rate
○ Average Loss Size
● Analyzed:
○ Expectancy
What to Expect when Trading 4 of 7

● Short puts have been the


strongest performer since
SPY Win Average Loss Average
Rate Profit Rate Loss
2005, due to the incredible
Strategy
bull market we have been
in.
16∆ Strangle 79% $96 21% -$228 ● Looking at these statistics,
which strategy would you
30∆ Strangle 75% $148 25% -$306
choose?
16∆ Put 83% $89 17% -$238 ● Which strategy has the
highest expectancy? Do
30∆ Put 78% $164 22% -$352 they all have a positive
expectancy?
16∆ Call 70% $45 30% -$122
What to Expect when Trading 5 of 7

● Expectancy as a raw number


Expectancy
does a good job of showing us
SPY Strategy Expectancy per $1 of
how risk, reward, and Risk
probabilities relate.
● However, focusing in on expected 16∆ Strangle $30 $0.13
return per dollar of risk provides
us with a more even statistic. 30∆ Strangle $37 $0.12
● While 30∆ puts have nearly 50%
greater expected profit than 16∆ 16∆ Put $33 $0.14
puts, the size of their losses
30∆ Put $49 $0.14
mean that we end up with the
same expectancy per unit of risk. 16∆ Call -$3 -$0.03
What to Expect when Trading 6 of 7

● The expectancy varies across


Expectancy underlyings, even if the strategy
16∆ Strangle Expectancy per $1 of is the same.
Risk ● In underlyings with higher
volatility, such as the Nasdaq,
we see a lower expectancy,
SPY $30 $0.13
even when compared to the
other indices.
QQQ $8 $0.05
● GLD saw the highest
expectancy per $1 of risk, even
IWM $23 $0.12
though it had the second lowest
GLD $22 $0.15
expectancy in pure dollar
amounts.
What to Expect when Trading 7 of 7

TAKEAWAYS:
● Expectancy provides a good idea of what to expect on a trade
by trade basis over the long term by showing the relationship
between risk, reward, and probability.
○ However, it does not take into account the potential tail risk.
● Expectancy varies across underlyings, and the volatility of each
asset may play a role in our expectations.
○ Looking at expectancy per dollar of risk helps us better
understand this.
● There are infinite ways to trade, but the only thing that matters
is that you have positive expectancy over many trades.
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