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The Importance of Adding Negative Delta

Feb 8, 2016

Despite the recent sell off in stocks, we know that over time the market tends to have a positive drift. Does that mean we should discount the importance of negative deltas in a short premium portfolio?

To test this, we compared selling puts to selling strangles over the past 10 years in SPY. Short strangles have upside risk, while short puts do not. Since the market has been in a bull market period for most of the time period, did selling strangles underperform selling puts?

A study was conducted using SPY (S&P 500 ETF) from 2005 to present. Using the option cycle closest to 45 days and holding the positions through expiration, we compared selling the 16 delta puts versus selling a 1 standard deviation strangle. A table of the results of comparing short puts to short strangles was displayed. The table included the percentage of profitable trades, average profit and loss per trade, average return on capital (ROC) and largest loss.

A second study with the same setup was conducted using the SPY (S&P 500 ETF) from 2005 to present. This time we entered the trades only when the implied volatility index known as the VIX was above 20.

Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for valuable takeaways and the detailed study results determining the importance of having some negative delta exposure in a short premium portfolio.

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.

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