Our overall approach to trading is to be premium sellers. We believe that doing so the correct way can produce consistently winning results. To really be successful though, it has to work in both Bull and Bear markets. We know that selling premium in Bull markets work because Implied Volatility gets crushed, but what about in Bear markets?
Our study was conducted in the SPY (S&P 500 ETF) using data from 2005 to the present. We chose the option expiration cycle closest to 45 days to expiration (DTE). We simulated shorting at-the-money (ATM) Straddles, 30 Delta Strangles and 1 Standard Deviation (SD) (16 Delta) Strangles. We then compared the results during the Bull Market from January 2005 to October 2007 and the Bull Market from March 2009 to the present along with the Bear Market in between.
A table of the results of the short Straddle and the two different short Strangles during the Bull Markets was displayed. The table included the average credit, win rate, average P/L, median P/L and largest loss. The table showed that short premium trades were quite profitable during Bull Markets. A second table provided the results during the Bear Market. The table showed that a few large losses skewed the average P/L negative, but the average credits and median P/Ls both increased during Bear Markets relative to Bull Markets.
Tom added, “Even in a nasty Bear market (2008) you still had a great win rate and median P/L and that is with no management. We have to continue the approach of selling premium no matter what.”
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and and results of our study on using premium selling strategies during both Bull and Bear markets.
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