This episode explores the effectiveness of skewed strangles, a trading strategy, compared to standard 16 delta strangles during market downturns. Against the backdrop of initial market data showing significant drops in MDSP and NADVEC, the hosts discuss alternative strategies. More significantly, the discussion centers on a premium-neutral approach to strangles, where the put and call options have equal premiums rather than equal deltas. For instance, Tom Sosnoff explains his preference for this method, highlighting how it positions puts further out of the money, mitigating risk during market declines. A study comparing the two strategies reveals that while the skewed strangle underperforms in up markets, it shows comparable performance or even outperforms the standard strategy during downturns, particularly in years like 2008, 2009, and 2022. The hosts conclude that while a standard 16 delta strangle is generally sufficient, a skewed strangle offers a valuable alternative when a bearish market outlook is anticipated, providing a way to manage risk without increasing position size. This means traders can adjust their strategies based on market conditions and directional assumptions.
