**This blog comes with a spreadsheet, but we can't figure out how to upload it to the blog. Email us at optionsgeeks@gmail.com and we'll send it (its an excel file). Also, if anyone can tell us how to upload it, that would be awesome. **
We took 10 stocks (or ETFs) whose volatility is elevated. We then compared three trades. The at-the-money straddle, a strangle consisting of both the 25 delta call and the 25 delta put (as close to 25 as there is anyway), and a 1 standard deviation strangle. (Note that due to skew, the strangle calls and puts are not the same distance from the at-the-money strike). Since there are 30 days to expiration now, we looked at all the dates with 30 days to expiration dating back to January 1st, 2010. We then checked to see how the current implied percentage moves in today's vols would have fared for each date. And we put all the results into a spreadsheet.
Go open the spreadsheet, and then continue reading to understand what its doing.
The "Main" tab shows the results for each trade in each stock. On it you'll see the win percentage for each trade in each name, along with P&L numbers. All of the P&Ls are based on doing a 1 lot only. It shows Total P&L (if you did a 1 lot every time), Avg P&L per 1 lot, and your biggest loss. We made sure not to pick any stocks with earnings within the next 30 days, as elevated vol is to be expected for that. Also, keep in mind that all of these trades assume you SOLD ON THE BID, which almost never has to be done, so these P&L numbers are actually lower than what they would actually be. Commissions are NOT factored in.
The individual tabs show you the results for each stock. In the top left area you see the current markets for the three trades and the strikes for the calls and puts. It then shows the percentage move implied on each side (since the calls and puts are NOT equidistant from the ATM strike). For example, EWZ closed at 41.35. The 25 delta call strike is 48. The 25 delta put strike is 37.5. That strangle closed at a BID of 2.10. So if EWZ goes up, your break even price is 50.1 (48 + 2.1). On the downside your break even is 35.4 (37.5 - 2.1). 50.1 implies a 21.2% move, and 35.4 implies a -14.4% move. So for the past dates, we checked for up-moves of 21.2% and down-moves of 14.4%.
Columns M, N, and O show the equivalent straddle values from the past dates using today's implied moves (the equivalent strangle info are in the next columns).
So, in EWZ, on 8/20/14, stock closed at 51.04. For the 25 delta strangle, the current strike is ~1.16 the value of the stock (48 / 41.35), which means the equivalent strike on 8/20/14 is 59.25 (48 / 41.35 * 51.04). The equivalent put strike is 46.29 ( 37.5 / 41.35 * 51.04). And the equivalent strangle price is 2.59 (2.1 / 41.35 * 51.04). We then compared that to how the stock actually did. Lets look:
On 8/20/14 it was 30 days before expiration date 9/19/14. Stock closed on expiration at 47.75. Since our equivalent strangle put strike was 46.29, stock stayed between our strangle strikes and this was a full win of $2.59 (P&L shown in column K). We then repeated that for each date.
You'll notice that, as expected, overall the 1 standard deviation strangle wins the highest percentage of the time, but also yields the smallest profit. It's the least risky of the three trades.
Analyzing all of the names we tested, it appears as if EWZ and XOP represent the best values. Since 2010, EWZ has only moved more than today's straddle percentage 5 times out of 56. Today's implied moves would have represented a whopping total profit of $30,936. ON 1 LOTS!!! Thats $552 per 1 lot! And that was hitting bids!
There's your study. Just remember, option sellers take on unlimited risk (theoretically) so don't make any 1 play too big. Keep it small so a crazy 2008-like move won't kill you.
These are NOT trade recommendations, just some of the research that we do.
Good luck.
