Exploring Generally Higher Success Rates of Top Sector Exchange-Traded Funds
By:Kai Zeng
Individual stocks tend to have a success rate similar to indices like the S&P 500. Moreover, these success rates are often better than what theoretical models predict.
Let's look at the success rates across different sectors.
The tastytrade research team has analyzed the performance of specific strategies in the top five holdings of five popular sector exchange-traded funds (ETFs):
Energy (XLE)
Technology (XLK)
Financials (XLF)
Health Care (XLV)
Utilities (XLU)
We tested the success rates of selling two types of options strategies with 45 days to expiration (DTE):
SPY 16 Delta Strangles (a more conservative approach)
SPY 30 Delta Strangles (a slightly riskier approach)
These five sectors show low to moderate positive correlations. That means the performance of stocks in these sectors doesn’t depend heavily on how other stocks in the sector perform, which provides a good mix for analysis.
We looked at the top five stocks in each ETF. For example, in the Energy sector (XLE), some of the key players are:
Exxon Mobil (XOM)
Chevron (CVX)
ConocoPhillips (COP)
Schlumberger (SLB)
EOG Resources (EOG)
The average correlation among these stocks was 0.29, indicating low to moderate reliance on each other’s performance.
What we found was interesting: For 16 delta strangles, all the ETFs and the top five stocks within them had higher success rates than the theoretical 68%. The results were very consistent.
For the riskier 30 delta strangle, the pattern held true. All the success rates were higher than the expected 58%.
Interestingly, the Technology ETF (XLK) had slightly lower success rates compared to other sectors. This trend is due mainly to the high volatility and sudden price jumps in tech companies like Apple (AAPL) and Microsoft (MSFT) over the past decade.
Lastly, we also examined whether there's a relationship between success rates and the stock's implied volatility (IV) or the premium level. We didn’t find strong connections here. The success rates for these sector ETFs remained fairly consistent and were slightly higher than that of SPY.
Kai Zeng, director of the research team and head of Chinese content at tastylive, has 20 years of experience in markets and derivatives trading. He cohosts several live shows, including From Theory to Practice and Building Blocks. @kai_zeng1
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