This is the third installment in our series into the edge of selling options. You can see the previous two parts here and here. As we said last time. We get the premium upfront, and then as time passes we generate profit as the option premium is worth less. If we check the distribution of monthly return we can see that selling puts have a much more consistent monthly return and less extreme monthly returns.
Another in-depth look into the performance showed that the strategy performance was good even in different market states:. This gives an additional edge to the strategy. While it is logical that the strategy would under-perform in bull markets the profit is capped and over-perform in sideways market profits from time-premium — It is NOT intuitive that the strategy out performs during bear markets as the common convention is that bear markets are dangerous and volatile.
We can see that the cash in T-bills provided extra protection and decreased volatility due to the low correlation and volatility of the T bills. Your email address will not be published. You may use these HTML tags and attributes: Notify me of follow-up comments by email.
Notify me of new posts by email. Powered by Pinboard Theme and WordPress. Another in-depth look into the performance showed that the strategy performance was good even in different market states: There are several reason for the edge of selling puts: While the movements are more volatile on the downside, the options usually price this risk and the IV rises when the traders anticipate a crush.
This allows us to roll and sell new puts for a higher premium and gain more protection. The strategy was created so the cash to secure the put sell was invested in T-bills. This allowed for another source of income and it also has low correlation to the market. The following chart shows the return of the cash secured put VS the put sell itself: Tips for selling naked puts: The higher the Implied volatility percent rank is better.
This will increase your chances for profit as you can roll the position or close it early. Sell options Out of the money — easier to capture theta, and allows you to buy the stock for a cheaper price. You can use our probability scanner: Leave a Reply Cancel reply Your email address will not be published.More...