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Sep 29, 2016

Increasing Duration in a Short Put Strategy

By:Sage Anderson

As traders we are constantly evaluating market conditions, and considering how depressed volatility levels have been for the bulk of 2016, it’s worth evaluating potential strategic adjustments to ensure our portfolio is maximizing available opportunities.

On a recent episode of Best Practices, hosts Tom Sosnoff and Tony Battista present a tastytrade study that examines the impact of increasing duration in a short put strategy.

The question is certainly pertinent because the depressed volatility levels we’ve observed for most of 2016 translate to lower premium in short-term options. Volatility may have increased recently, but it was short-lived. Consequently, rating the performance of options with longer dated expirations may at least provide additional perspective.

In order to produce a side-by-side comparison, the Best Practices team designed a study that analyzed data from the SPY (2005 to present), selling 1 standard deviation puts (approximately 16 delta), and holding trades in the range of 45-365 until expiration.

The results from this study indicated some clear trends across the range of expirations.

For example, the data shows that the average P/L over the lifetime of the position was greater for longer term options. However, it was also revealed that the average P/L per day was higher for options of shorter duration (closer to the 45 days-to-expiration).

Notably, the overall win rate was also higher for puts with shorter duration.

The chart below shows the P/L per day of short-term options (blue line) versus long-term options (green line):

While the results arguably support the deployment of either strategy, traders should ensure they understand the unique risk profiles of each before deploying positions.

We recommend you watch the entire episode dedicated to the relative performance of increased duration in a short put strategy when your schedule allows.

If you have any follow-up questions, please reach out at support@tastytrade.com.

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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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