Backtesting
Tuesday, October 8th 2019
Is Selling Options Still Worth The Risk? IPS Strategic Capital Cites ORATS Backtesting Data
Selling options is popular and has driven prices down to the point where it had made sense to buy them.
Summary
According to IPS Strategic Capital, selling premium is still popular, but the edge has flipped to buying options as shown in their graph from the beginning of 2018 using ORATS backtesting data. If you can own optionality receiving the benefit of being long gamma with a low carry cost, then you can participate in the market's upside but define your risk to the downside. There are very few long option strategies in the marketplace today that are effectively exploiting this edge and are worth exploring.
"Selling premium is alive and well and money continues to pour into these strategies, which means being long options have become relatively cheap." Write Dominick Paoloni and Patrick Hennessy of IPS Strategic Capital. However "the edge has flipped to buying options" as shown in their graph from the beginning of 2018 using ORATS backtesting data.
- Red line – buying 30d ATM SPX calls, rolled with 10 DTE
- Blue line – selling 30d ATM SPX puts, rolled with 10 DTE
- Gold line – SPX covered call strategy, rolled with 10 DTE
- Green line – benchmark (a delta equivalent amount of the underlying, SPX)
**If you can own optionality receiving the benefit of being long gamma with a low carry cost, then you can participate in the markets upside but define your risk to the downside.**Using optionality in this way, we have learned that it is possible to achieve the proverbial “have your cake and eat it too”. There are very few long option strategies in the marketplace today that are effectively exploiting this edge and are worth exploring.
ORATS corroborates the IPS findings using a similar study backtesting SPX long straddle that exits with 10 days to expiration and the short variety of this trade.
Since 2018, being long this straddle has out performed being short.
This is not a recommendation to buy or sell securities. See our terms here.
Disclaimer:
The opinions and ideas presented herein are for informational and educational purposes only and should not be construed to represent trading or investment advice tailored to your investment objectives. You should not rely solely on any content herein and we strongly encourage you to discuss any trades or investments with your broker or investment adviser, prior to execution. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. Option trading and investing involves risk and is not suitable for all investors.
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Day trading, short term trading, options trading, and futures trading are extremely risky undertakings. They generally are not appropriate for someone with limited capital, little or no trading experience, and/ or a low tolerance for risk. Never execute a trade unless you can afford to and are prepared to lose your entire investment. In addition, certain trades may result in a loss greater than your entire investment. Always perform your own due diligence and, as appropriate, make informed decisions with the help of a licensed financial professional.
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Be sure to read the OCCs Characteristics and Risks of Standardized Options to learn more about options trading.
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