The July 8, 2016 Market Measures segment: How Overpriced are SPY Options? demonstrated how, on average, a strategy of shorting the at-the-money (ATM) Puts in SPY (S&P 500 ETF) has been profitable. The ATM Put has a Delta of 50. Tom and Tony’s experience has convinced them that a somewhat lower Delta is preferable. So which Delta produces the most desirable combination of risk and reward when shorting Puts and how much should we hope to make?
Our study was conducted in the SPY (S&P 500 ETF) from 2005 to the present. Using options with 45 days to expiration (DTE) we sold Puts with a 50, 35, 25 and 15 Delta. We compared holding to expiration or managing at 50% of max profit managing at 50% of max profit (if possible) or taking a loss at 2x the credit received.
A table displayed the results. The table included the average P/L per TRADE as a percentage of the credit received and the average P/L per DAY as a percentage of the credit received. The table showed that managing the short puts greatly increased the P/L per day percentage. A second table showed what the P/L might be based on the Delta. It showed the current prices for the different Deltas, the expected P/L per trade and the expected P/L per day for all the Deltas in the study. Tom noted, “your max risk is the same (for all the Deltas) but the expectation has to be different”.
For more information on Short Puts see:
Market Measures from September 1, 2015: “Short Puts | Managing Winners & Losers”
Strategies For Your IRA from October 6, 2015: “Short Put Replacement”
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the key takeaways and the results of our study on a strategy of shorting Puts with various Deltas and what to expect in average P/L for each Delta.
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