The smell of fear is in the air as markets have tumbled this year. Although we want to be brave, we also want to be smart, so we ran a study testing if selling premium after a large market move is a smart trading strategy. Every premium seller can benefit from this data.
Dr. Data explained in a segment of the Skinny on Options: Data Science that although the market goes up about 53% of the time and down 47% of the time, that following a big up or down move, we cannot reliably expect a reversal. We believe in selling premium though, so what’s more important is how that works following large moves.
A study was conducted using SPY (S&P 500 ETF) from 2005 to present. We looked at week-over-week moves that were greater than 2.5%. After down moves we sold the at-the-money (ATM) put with 45 days to expiration (DTE) and compared it with buying 100 shares of SPY. After up moves we sold the at-the-money (ATM) call with 45 days to expiration (DTE) and compared it with selling 100 shares of SPY. We held both positions until expiration.
A table comparing a short ATM call position in the SPY to a short 100 shares of SPY on week-over-week market increases that were greater than 2.5% was displayed. The table included the average P/L, percentages of profitable trades and largest loss on both.
A separate table comparing a short ATM put position in SPY to a long 100 shares of SPY position on week-over-week market decreases that were greater than 2.5% was displayed. The table included the average P/L, percentages of profitable trades and largest loss on both.
Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the valuable takeaways and the detailed study results showing whether selling premium after large moves, both up and down, is a viable strategy or not.
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