Sell into strength. Buy into weakness. Over the past seven years or so there has not been a whole lot of weakness to buy into. However, selling into strength hasn’t been a problem. The question is, if we are going to sell into strength, where should we be looking to sell?

Using SPX, the Research team took a look at selling calls over the past ten years to see what the results looked like. For strikes, they used the at-the-money call, 30 delta (0.5 standard deviation), 16 delta (1 standard deviation) and 7 delta (1.5 standard deviation) calls. Results were compared between managing trades at 50% or holding until expiration.

Holding Until Expiration

It makes sense lower delta calls would have a higher win rate; they are further out of the money. They also collect less premium. Still, the 0.7 delta calls were successful an astounding 93% of the time with an average daily P/L of $2.08. At-the-money calls had the lowest win rate but still managed to be profitable 53% of the time; however, their average daily P/L was negative making the strategy unsuccessful. The 30 delta call turned a profit 68% of the time with an average daily P/L of $2.23 while the 16 delta call worked out 81% of the time with an average daily P/L of $2.23.


As for losses, the range was wide with at-the-money calls experiencing the biggest loss, $15,260. The 7 delta call’s biggest loss was $5,870. The 30 and 16 delta call’s worst losses were $12,070 and $10,035, respectively.

Taking into account win rate, average daily P/L, and biggest loss, the 16 delta call was the best performer.

Managing at 50%

It should not be a surprise to tastytraders managing at 50% performed better across the board. At-the-money calls were not successful even when managed at 50%. Biggest losing trades in each instance were the same as when held to expiration. However, the 16 delta call (1 standard deviation) saw its average daily P/L jump to $5.20. The 30 delta and 7 delta calls had an average daily P/L of $4.46 and $3.56, respectively.

Not only was the 16 delta call the best performer, but we can also see how managing winners at 50% increases average daily P/L.

Bull or bear market, tastytraders can see why we talk about selling at one standard deviation and managing at 50%. That is the tastytrade recipe for success.

Josh Fabian has been trading futures and derivatives for more than 25 years.

For more on this topic see:

Market Measures | Short Calls: Selection and Performance: May 18, 2016