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Sep 30, 2016

Backtesting Long Put vs. Short Call

By:Sage Anderson

With US equities still near all-time highs, and interest rates possibly moving higher in the foreseeable future, more than a few traders are likely wondering if a pullback in stock prices may be coming soon.

Market participants expecting a pullback can obviously express a bearish view by closing long stock positions, or even going short stock in names they think are particularly vulnerable.

However, traders can also access short delta exposure by trading options - through call sales or put purchases.

For those contemplating short delta positions using options, a recent episode of Options Jive may assist you in analyzing the best possible path for your portfolio.

In order to provide context on this question, the Options Jive team put together a study that backtested the success of a short call strategy as compared to a long put strategy.

The parameters of the study included the following:

  • Used data from SPY (2005 to present)

  • Compared 2 strategies

  • Strategy 1 - Sell 30 delta calls (hold through expiration)

  • Strategy 2 - Buy 16, 30, 50 delta put (looked at holding through expiration as well as three other managing profit/loss strategies)

The results of this backtest are shown below:

As you can see from the above, comparing the strategies when each was held through expiration (no management of positions), the short call strategy was the only one that produced a profit (on average).

More importantly, not one of the long put strategies produced a profit (on average) across any of the 4 scenarios.

As most of us are likely already aware, all-time highs in equities also tend to correlate with low volatility regimes. In order to further test the potential success of long put strategies, the Options Jive team conducted another study examining the results of long put strategies during such periods.

The guys re-ran the backtest on long put strategies but this time filtered only for occurrences when the VIX was below 15 (low volatility environments). You can find more detailed information on this study embedded within the episode, but once again, none of the strategies produced a profit (on average).

While the above studies did not provide a compelling reason for buying puts in low volatility environments, it is possible that such an approach works effectively for your unique portfolio strategy (for hedging, protecting, etc...).

If you have any questions on the above information, or have some suggestions on future tastytrade programming, we encourage you to leave a comment below or reach out at support@tastytrade.com.

We look forward to hearing from you!

Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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