Option Strategies for Earnings Announcements: A Comprehensive, Empirical Analysis by Ping Zhou & John Shon

Author:Ping Zhou & John Shon [Zhou, Ping]
Language: eng
Format: mobi, azw3
Publisher: Pearson Education
Published: 2012-10-14T22:00:00+00:00

Short Strangles: The Baseline Case

The performance of short strangles is summarized in Table 7.2. We tested strangles with out-of-the-money options (more than 5% but less than 10% away from the underlying equity price). In general, the results show that short strangles tended to perform better than short straddles. For example, using the 75% rule, the average return of short strangles was –2.65%, compared to –3.83% for short straddles. The median return was much higher for short strangles than for short straddles (6.17% versus 1.93%). Short strangles were profitable 61.2% of the time, compared to 54.9% for short straddles. These results contrast with those in Chapter 6 in which long strangles underperformed long straddles. Long strangles require larger price movements to become profitable relative to long straddles. On the flip side, short strangles can withstand larger price movements relative to short straddles.

Table 7.2. Performance of Short Strangles: The Baseline Case

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