Alert

Cardano, the sixth largest crypto asset by market cap, is now available to trade on tastyworks. Here’s what you should know.
tastytrade

Blue Chip Put Sales

Oct 21, 2016

By: Sage Anderson

If you're an active investor you are no doubt familiar with the term "Blue Chip."

In the market, "Blue Chip" typically refers to publicly traded companies with large market capitalizations (in the billions) that are nationally recognized.

While there aren't precise guidelines for identifying "Blue Chips," the 30 companies included in the Dow Jones Industrial Average (DJIA) are usually associated with this naming convention. Other large, high quality companies that have long track records of success may also be referred to as "blue chip."

Consensus opinion suggests the term originally derived from 19th century poker sets, which often designated blue-colored chips as the most valuable (white = $1, red = $5, blue = $25).

Blue chips can be attractive to option traders (especially premium sellers) because the risk of bankruptcy in these companies is usually lower (relatively speaking) than other companies operating in the same industry.

A recent episode of Market Measures put the spotlight on "Blue Chips" and investigated whether large moves in such stocks opened an attractive window of opportunity for selling premium.

In order to analyze this question, the Market Measures team designed a study that compared the results of selling premium in Blue Chips across all market environments versus selling premium only after out-sized downward moves in the stocks.

The study therefore included the following parameters:

  • Using data from 2005 to present

  • Incorporated the top four holdings of the DJIA (MMM, GS, IBM, and UNH) and the Dow Jones ETF (DIA)

  • Sold 45 days-to-expiration (DTE)

  • Managed trades at 50% of max P/L

The above data was then backtested using two filters - the first being all market environments, and the second being only when the stocks sold off more than 5% the week prior.

The results of the study are quite instructive, and clearly show that the latter group (selling puts after a big move) produced higher returns.

What's even more interesting is that exposure to large losses was also reduced - when comparing all environments to only selling after a large down move.

For example, in MMM, when selling across all environments, the median P/L was $1.35 with the largest loss being -$17.82. However, when limiting trades to only after a large downward move (5% or greater the week prior), the median P/L improved to $1.87, while the largest loss decreased to $13.20.

Results for each of the other 4 symbols in the study showed a similar trend.

We hope you'll take the time to watch the full installment of the Market Measures focusing on Blue Chip stocks when your schedule allows.

While this particular trade may not fit your current strategic approach and/or risk profile, it's possible the concepts discussed on the episode may help you identify other opportunities in your portfolio.

If you have any questions about the aforementioned information, don't hesitate to contact us 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.

Related Posts

tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com.

tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”). tastytrade is a trademark/servicemark owned by tastytrade.

Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information on this site should be considered general information and not in any case as a recommendation or advice concerning investment decisions. The reader itself is responsible for the risks associated with an investment decision based on the information stated in this material in light of his or her specific circumstances. The information on this website is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading in derivatives and other financial instruments involves risk, please read the Risk Disclosure Statement for Futures and Options. tastytrade is an investor in Small Exchange, Inc.

© copyright 2013 – 2021 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on tastytrade.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.