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Short Puts: Increasing Duration

Sep 6, 2016

The largest weakness of a strategy that sells premium in high Implied Volatility (IV) environments is that you you may be doing nothing if the IV Rank (IVR) remains low during an extended period of low IV. Some of our viewers have asked about increasing duration in such a situation and selling premium well more than our usual 45 days to expiration (DTE).

Our study was conducted in the SPY (S&P 500 ETF) using data from 2005 to the present. We placed a position of short Puts with a 16 Delta 1 Standard Deviation (SD) at various expiration cycles from 45 to 365 DTE. All trades were held to expiration.

A bar graph showed the results that the average P/L increased on the short SPY Puts the longer the duration. A second bar graph showed that the shorter duration of 45 DTE SPY Puts produced the best average P/L per day. A third graph showed that the win rate was lower with an increase in DTE. Tom and Tony summarized the results by stating, “now you understand why we do what we do and choose 45 DTE“. A final graph showed that although the premium is higher at order entry extending duration results in a lower P/L.

For more information on Short Puts see:

Market Measures from September 1, 2015: "Short Puts | Managing Winners and Losers"
Market Measures from May 4, 2016: "Increasing Duration | A Put Selling Experiment"
Market Measures from July 14, 2016: "Short Puts: Expectations for Different Deltas"

Watch this segment of Best Practices with Tom Sosnoff and Tony Battista for the key takeaways and the detailed results of our study comparing a strategy of short Puts over various durations.

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