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      Market Data provided by CME Group & powered by dxFeed Technology. Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
      Market Measures

      Product Indifference: Analyzing Premium

      Jul 21, 2016

      A key part of our way of trading is in selling option premium. We look for good opportunities to do so such as extreme price action or Implied Volatility Rank (IVR). When given the choice between different index ETFs in which to sell premium we should choose based upon a higher IVR as long as the liquidity in them is similar. We believe in product indifference. What do we do though if there is no difference in IVR or liquidity? How can we choose?

      Given that all these underlyings are different prices, it would make sense to analyze the premium collected per $1 of underlying price. So our study was conducted using the IWM (Russell ETF), SPY (S&P 500 ETF) and QQQ (Nasdaq ETF) using data from 2005 to the present. We took the premium collected from selling 1 Standard Deviation (SD) Strangles, meaning the Call and Put had a Delta of 16 and divided that premium by the price of the underlying.

      A table of the results included the average credit received, average premium per 1 contract (credit x 100) and average premium per dollar of the underlying price was displayed. The table showed that IWM was the best choice but this did not take into account Implied Volatility (IV). A second results table included the average premium per dollar of underlying price as well as the average premium dollar of underlying price per IV point. When the premium is equated per implied volatility point, all three ETFs came out the same, IWM no longer is the clear winner as before. While premiums in all 3 will differ from one another, the risk compensation of selling the strangle is (on average) the same.

      Tom and Tony noted, “this supports the concept of product indifference, this supports the argument for strategic diversification, non-correlated underlyings and symmetrical pricing.”

      Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and results from our study which show why we believe in product indifference and maintain our focus on high IV, price extremes and strategy diversification.

      This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

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