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Product Indifference: Analyzing Straddles - Jul 27, 2016 | Market Measures
We wanted to compare premium collected in 3 ETFs (IWM, QQQ and SPY). To do this we didn't just look at the premium collected but factored in IV to calculate the average premium per dollar of underlying price, per IV point. Find out how they stac...
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      Market Measures

      Product Indifference: Analyzing Straddles

      Jul 27, 2016

      The Market Measures on July 21, 2016, "Product Indifference: Analyzing Premium" analyzed the premium collected in the 3 major market ETFs (IWM, QQQ and SPY). We wanted to compare apples to apples so we looked at not just the premium collected but factored in Implied Volatility (IV) to calculate the average premium per dollar of underlying price, per IV point. The study was based upon our standard 1 Standard Deviation(SD) Strangles. There was a negligible difference between the three ETFs. A question then arose about strategy indifference. What would happen if we used Straddles instead of Strangles?

      Our study was conducted in the IWM, QQQ and SPY with data from 2005 to the present. We analyzed the at-the-money (ATM) Straddles, specifically, the strike closest to a 50 Delta for the Call and Put. We recorded the premium collected in dollar terms (credit x 100) and divided the premium by the price of the underlying. We then divided that number by the IV.

      A table of the results included the average credit received, average premium collected and average premium per dollar of the underlying price was displayed. The table showed that with the short Straddles (similar to Strangles), IWM had the highest premium per dollar of the underlying price. A second table displayed the figures for the average premium per dollar of underlying price, per IV point and this revealed a negligible difference, just as the study using Strangles had. These studies support our view of product indifference. Focus should be on measures such as liquidity, IV and price extremes.

      For more information on Straddles see:

      Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the results of our study using Straddles to measure the average premium per dollar of underlying price, per IV point across the three main stock index ETFs.

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