The market, aka the S&P 500, has had a return of 81% since 2005 although the ride has sometimes been bumpy. Each share of the SPY, the ETF representing the S&P 500 though is well over $200 per share. Using the close last Friday, July 22, 2016, of $217.24 means that 100 shares would cost $21,724. The August 210 call though, representing 100 shares and which had a Delta of 80 only cost 8.00 at the close, or $800. Since we can buy deep in-the-money (ITM) calls with low extrinsic value instead of buying the stock outright for much less, is this is the options strategy we should use?
Our study was conducted in the SPY (S&P 500 ETF) using data from 2005 to the present. We examined trades every day using options with 45 days to expiration (DTE). We compared buying the 80 Delta Calls to selling ½ Standard Deviation (SD) Strangles (30 Delta Put and 30 Delta Call). We also broke down the results into situations in which the market went up between the time of our order entry and expiration and when the market went down.
The first table displayed the results for when the market went up. The table included the average Credit/Debit, win rate, average P/L, average win and average loss. As expected the 80 Delta calls won over the short Strangles, but the Strangles also performed well. The second table showed the results in a down move. A second results table compared the performance of the two strategies when the S&P decreased from trade entry to expiration. In this case the win rate for the long Call went from 90% to zero. The other metrics for the long call were also poor. Since the long calls are long Delta and short Theta (time decay) they perform poorly in down moves. A final results table combining both data sets was displayed. Comparing strategies in all occurrences, the long 80 Delta call had a 57% success rate as compared to 81% for the ½ SD short Strangle and the average long call P/L was half that of the short Strangle.
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the results from our study comparing long ITM Calls to short ½ SD Strangles which indicates what type of option trading strategy we should utilize.
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