Our studies have shown that premium selling utilizing Delta Neutral strategies such as short Strangles and short Straddle can be quite profitable. The August 30, 2016 segment of Strategies for your IRA, "What Call Do I Buy?" explained how we can simulate such a position in an IRA account by purchasing an out-of-the-money (OTM) Call without adversely affecting the win rate or median P/L.
Buying the OTM Call is like paying a tax to have a tax free account. Additionally the Buying Power Reduction (BPR) In an IRA when shorting an SPY Straddle with a long 5 Delta Call is about $21,000. Since we are essentially shorting Implied Volatility (IV) we wondered about an alternative using VIX options. A short at-the-money (ATM) Vertical Call Spread (long the 10 Delta Call) in the VIX options would only see a BPR of around $1500. How would it perform?
We compared our IRA Straddles managed at 25% of max profit if possible in SPY to the short ATM Call Spreads in VIX managed at 50% if possible. The Straddles had a higher median P/L but the Call Spreads had a higher win rate, lower largest loss (less than half) and as noted above a much easier to handle BPR. Since we know that VIX options exhibit an inverse Volatility Skew selling the Call Spreads in the VIX should work especially well when IV rises. We then filtered for occurrences in which the VIX was above 20, which would mean a high IV Rank (IVR). The metrics for both strategies improved with the win rate for the short Call climbing above 90%.
For more information on the VIX and VIX Spreads see:
Market Measures from June 17, 2016: "Fading Fear | Trading After Large VIX Moves"
tasty BITES from June 21, 2016: "Getting Long VIX with Limited Capital"
Market Measures from June 28, 2016: "Buyer Beware | VIX Call Calendars"
Market Measures from September 19, 2016: "Short Premium or Short VIX"
Watch this segment of Strategies for Your IRA with Tom Sosnoff and Tony Battista for the important takeaways and an alternative approach to replicating a short Straddle (with wings) in your IRA account.
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