Dear trading community,
I have seen a lot of discussions on Twitter lately about the issue if selling naked strangles or straddles is a great strategy or a recipe for disaster.
If you have read my books or if you are following my sample portfolio, you know that I'm a huge fan of selling short strangles and straddles.
But with undefined risk strategies comes theoretical unlimited risk.
Therefore it is crucial that you follow the rules I pointed out in my [books](https://www.amazon.com/-/e/B07HFBM58D) and which are mentioned about almost every day on [tastytrade](https://www.tastytrade.com)
# Rules:
- do not use more than 40 - 50% of your available capital on your overall portfolio
- do not use more leverage than 3x notional of your net liq (if you have a $100k account, don't go over $300k notional)
- manage at 21 DTE to avoid gamma risk
- manage your strangles at 50% of max profit and your straddles at 25% of max profit.
- spread your risk among lots of uncorrelated underlyings
- commit capital based on IVR or the VIX (high VIX risk up to 50% on your overall portfolio, if VIX is low, risk less)
**Now let's have a look at what you can expect in profit if you sell different type of strangles/straddles:**
# 16 Delta Short Strangles:
[tastytrade](https://www.tastytrade.com) has shown in a [study](https://www.tastytrade.com/tt/shows/market-measures/episodes/how-much-theta-is-captured-09-07-2016) that you can expect to keep **25% of the daily theta** if you sell **16 delta short strangles** in **SPY, IWM** and **TLT**.
<center>**Image source**: [tastytrade](https://www.tastytrade.com/tt/shows/market-measures/episodes/how-much-theta-is-captured-09-07-2016)</center>
Let's have a look at how much contracts you could sell, until you exceed 50% of your capital in margin requirement and/or 3x notional leverage and how much money you would make in a full year.
For the study I was using **August 13th 2019 closing prices**.
Although the percentage of theta you can expect to keep is higher than 25% in SPY and IWM, I was using the 25% number, to be more conservative.
## SPY 16 Delta Strangles
As you can see, if you just sell 16 delta short strangles in SPY, you can expect to make **9.11%** in profit, if you go up to **3x notional leverage**.
## IWM 16 Delta Short Strangles
As you can see, if you just sell 16 delta short strangles in IWM, you can expect to make **10.93%** in profit, if you commit **50% of your buying power**.
Now let's have a look at **short straddles**.
[tastytrade](https://www.tastytrade.com) has shown in a [study](https://www.tastytrade.com/tt/shows/market-measures/episodes/theta-expectation-straddles-04-19-2017) that you can expect to keep **40-50 % of the daily theta** if you sell **atm short straddles** in **SPY**.
<center>**Image source**: [tastytrade](https://www.tastytrade.com/tt/shows/market-measures/episodes/theta-expectation-straddles-04-19-2017)</center>
Let's have a look at how much contracts you could sell, until you exceed 50% of your capital in margin requirement and/or 3x notional leverage and how much money you would make in a full year.
For the study I was using **August 13th 2019 closing prices**.
For the daily theta you can expect to keep, I was using **45%** as the [tastytrade](https://www.tastytrade.com/tt/shows/market-measures/episodes/theta-expectation-straddles-04-19-2017) suggested.
## SPY Short Straddles
As you can see, if you just sell **atm short straddles in SPY**, you can expect to make **18.13%** in profit, if you commit **46.83% of your buying power**.
## IWM Short Straddles
As you can see, if you just sell **atm short straddles in SPY**, you can expect to make **25.25%** in profit, if you commit **48.12% of your buying power**.
Since we want to diversify our portfolio, let's have a look at the **5 most uncorrelated underlyings**, which I showed in my first [book](https://books.apple.com/us/book/id1436443812).
For these examples I was using today's (August 14 2019) prices right at the open.
## GLD Short Straddles
## TLT Short Straddles
## FXE Short Straddles
## IWM Short Straddles
## XLE Short Straddles
In the next article I will show you how to build a portfolio with these five underlyings and how to commit your capital based on the VIX, so that you don't get wiped out in a move we experience at the moment.
**If you want to learn more about options trading, please check out my books:**
The first book is still available for a huge discount on [Google Play](https://play.google.com/store/books/details?id=LXV0DwAAQBAJ), so buy as long as it is still cheap.
You can also buy it for **$19.99** on [iTunes](https://itunes.apple.com/us/book/id1436443812), [Amazon](https://www.amazon.com/dp/B07HDWRRQ3) or [Barnes and Nobel](https://www.barnesandnoble.com/w/if-you-can-order-a-pizza-you-can-trade-a-mechanical-approach-to-options-trading-stephan-haller/1129792853?ean=2940161717721).
Thanks to all my readers for buying it.
If you like it, you would do me a great favor by writing a short review on amazon.
<br>
My second book is available for **$5.99** on [Amazon](https://www.amazon.com/dp/B07KVNVQXZ), [Google](https://play.google.com/store/books/details?id=9Zh7DwAAQBAJ) and on [Apple](https://itunes.apple.com/us/book/id1444520033).
Thanks to all my readers for buying it.
If you like it, you would do me a great favor by writing a short review on amazon.
<br>
My third book is available on [Amazon](https://www.amazon.com/dp/B07T3Y6WZC), [Google](https://play.google.com/store/books/details?id=IJudDwAAQBAJ) and [iTunes](https://books.apple.com/us/book/id1468791563).
[](https://www.amazon.com/dp/B07T3Y6WZC)
<br>
Have a great trading day,
Stephan Haller
<br>
**Legal disclaimer:** *These are not trade recommendations. Options involve risk and are not suitable for all investors. The trades shown above are for educational purpose only.*