Our results suggest, selling SPY strangles are generally profitable across a variety of widths. However, the payoff profile of a short option strangle exposes the contract seller to a potential for unlimited losses. Our evidence on maximum drawdowns indicates that losses on some positions can be the equivalent of the profits gained on approximately forty prior positions. This payoff profile has given rise to the metaphor of selling option contracts as the equivalent of “picking up nickels in front of a steam roller.” The goal of our paper is to analyze the full return characteristics of option strangles and to develop a set of models to help investors avoid getting steam-rolled. As a result, we forecast the likelihood of profitability of SPY strangles. We use information that is available at the time a position is under consideration to attempt to avoid strangle positions with potentially large losses.
Kownatzki, Clemens and Sabouni, Hisam, "Option Strangles: An Analysis of Selling Equity Insurance" (2019). Pepperdine University, Graziadio Working Paper Series. Paper 25.