Earlier this week, tastylive did a study where they sold SPY Puts after consecutive down days in the market (click here for the episode). The trades benefited from “buying SPY in weakness” and with inflated implied volatility.
In today’s segment, our team analyzed selling short Calls after consecutive up days in the market to see if “selling into strength” is profitable. One major concern, however, is that short Call option prices can be hindered by low volatility due to less marketplace “fear” during rallies.
The Research Team flipped their study from Jan. 10th, selling Calls after multiple up days. The parameters for study were:
- S&P 500 ETF (SPY)
- 2005 - Present
- 45 DTE
- Short 30 Delta Calls
- Managed at 50% or Held to Expiration
- Compared: All Occurrences, All Up Days, Consecutive Up Days (1, 2, 3, 4, 5, and 6)
Because of positive drift in the market, there was a slightly higher than 50% chance that up days follow one another, which ultimately reduces VIX prices due to its inverse correlation to equity markets. But can we overcome this obstacle by timing our short Call entry properly?
The research revealed that a case can be made for waiting for 1 or 2 up days before selling a Call, but the longer we waited to enter the short Call, the more irregular the average P/L.
Ultimately, contrary to the short Put study, implied volatility works against traders selling SPY Calls into up moves. While selling Calls in up moves performed better when considering all occurrences, there was no historical merit to waiting for 3+ day rallies to enter a short position.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.