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Market Measures

Short Straddles in Sector ETFs

Nov 17, 2016

Yesterday’s November 16, 2016) Options Jive segment Sector rotation examined the divergence of several sectors in the days following last week’s election. Today’s segment looks at the historical performance of short premium in some of those sectors. A list of the top 6 sector ETFs was displayed. The ETFs were: XLE (Energy), XLF (Financials) , XLI (Industrials), XLP (Consumer Staples), XLU (Utilities) and XLV (Healthcare). A table of the correlations between the ETFs and the SPY (S&P 500 ETF) was displayed. The table showed the weak correlations between many of the sectors. This means we can be truly diversified by utilizing the different sector ETFs. How do our usual strategies perform though in these ETFs?

Our study was conducted in the 6 sector ETFs mentioned above using data from 2005 to the present. We chose the option expiration cycle closest to 45 days to expiration (DTE). We sold at-the-money (ATM) short Straddles and managed the trade at 25% of max profit, if possible, or held to expiration if we could not.

A results table on the sector ETF short Straddles was displayed. The table included the win rate, average P/L, average win and average loss. The table showed that all the ETfs had similar win rates but different P/Ls due the the variation in underlying prices. Our studies often filter for instances of high Implied Volatility (IV) as measured by an IV Rank (IVR) at 50 or higher. Because of data limitations we used SPY IVR as a substitute. Win rates and P/L were generally higher but the table displayed all the data which included some exceptions. Tom made the point that, “The argument here is for high Implied Volatility, diversification and product indifference. So you have non-correlation, plenty of liquidity and competitive markets. So it doesn't necessarily matter what products you are trading and the lower priced underlyings give us an opportunity to sell premium.”

Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the results of our study on selling Straddles in various sector ETFs.

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