While new all-time highs in global equity indexes could certainly extend into 2018 and beyond, it's never too early to start planning for a paradigm shift.
As we saw this week, tranquil markets such as those witnessed throughout 2017 simply don't last forever.
And while you may not have embraced the contrarian approach, it's great to have a framework in mind for how you might adjust your strategy when volatility does pick up.
Along those lines, we highly recommend that tastytraders review a recent episode of Market Measures entitled "Selling Puts During Selloffs." As the title suggests, the episode focuses on market environments that are characterized by downward action in equity prices (yes, it can happen!).
As most volatility traders have already observed in 2017, volatility has tended to pick up when the markets have turned south. What's been lacking has been the follow-through. Every time the market has faltered, it has regained its footing in rapid fashion.
On this installment of Market Measures, the hosts present a study conducted by tastytrade that examines the historical success of selling 30 delta puts during extended selloffs - specifically after a 5% drop (at minimum) in the underlying.
The results, compiled and presented on the show, may help traders better prepare for such conditions in the market, whenever they do finally materialize.
The backtest used in the study included the following parameters:
Sold 45 DTE, 30 delta puts
Managed at 50% of credit received
Data from 2005 to present
Symbols included: SPY, AAPL, MSFT, JNJ, XOM, JPM
Scenario 1: all trades
Scenario 2: trades deployed only after stock was down 5% in 10 days
Looking at Scenario 1 (all trades), the results of the study showed attractive win rates of 90% or greater for all symbols included in the study. Certainly nothing to sneeze at...
However, as you can see in the slide below, the win rates increased across the board when filtering only for put sales that occurred after the underlying had dropped at least 5% (in a day 10 span). The lone exception was AAPL, which saw only a slight reduction in its overall win rate under Scenario 2:
The results of this particular study indicate that the extra pop in volatility from an extended selloff has historically shown an even more attractive opportunity to sell puts.
We hope you'll take the time to review the complete episode of Market Measures focusing on put sales during selloffs when your schedule allows.
Please don't hesitate to contact us with any questions or comments. Feedback from traders is critical in helping us produce the most timely and relevant articles and segments possible.
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.