The Bond market has sold off recently while the Dow and the Russell continue to make new all time highs while the S&P 500 has been somewhat flat after rallying near new highs. Some are starting to see some relief in their short market & short bond bias. How has this position performed in recent years in what has been a mostly bull market for both? An 11 year graph comparing the price movement of the SPY and the TLT (Bond ETF) was displayed. The graph showed that although being negatively correlated that both have been on a strong uptrend since 2008. Since 2005 the SPY is up 117% and the TLT 118%.
Based upon a hypothetical $1 million dollar regular margin account, our study was conducted using data in the SPY and TLT from 2005 to present. We chose the option expiration cycle closest to 45 days to expiration (DTE). We sold the 16 Delta / 1 Standard Deviation (SD) Calls. We opened a new position only after closing the old position. We allocated 15% of the account to the SPY and 15% of the account to the TLT.
The extrinsic value in the Calls counteracted being directionally wrong. During the same period of time, the portfolio with the short stock lost 50% of its original account value. A P/L results graph showed that although being directionally wrong for a decade, the portfolio with both short SPY and TLT Calls actually yielded a small positive P/L.
For more information on the benefits of Selling Premium see:
Market Measures from July 25, 2016: "Long Calls vs. Short Premium"
Options Jive from September 14, 2016: "Strategy Comparison: Short Premium"
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the results of our study showing how you can profit by selling premium and win even when you’re wrong directionally.
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