A trader with a bearish bias in an underlying can buy Puts in which his profit potential is practically unlimited or can short Calls for small but usually consistent profits. As Tom noted, “What we’ve learned is that if you limit profitability you raise your probability of success. Is there a situation where you would go long Puts for unlimited profitability?”
Our study was conducted in the SPY (S&P 500 ETF) using data from 2005 to the present (3000 Occurrences). We compared selling the 30 Delta Calls and holding to expiration versus buying the 16, 30 or 50 Delta Puts and managing winners at 50%, 100% or 200% of the Debit paid.
A table displayed the average P/L per trade results for the short Calls and the long puts with no management and managed at the levels listed above. Selling premium in the Calls was profitable. None of the long Put strategies were profitable or able to overcome Theta (time decay). A second table just of the various Put strategies but filtered for instances when Implied Volatility (IV) was low (as measured by a VIX below 15) was displayed. Once again, over the long-term all the long Put strategies were losers.
For more information on Long Call & Put Premium see:
Market Measures from April 14, 2016: "Buying Puts into Earnings"
Market Measures from April 26, 2016: "Buying Premium Before Earnings"
Market Measures from July 25, 2016: "Long Calls vs. Short Premium"
Watch this segment of Options Jive with Tom Sosnoff and Tony Battista for the important takeaways and the detailed results of our study comparing a strategy of short Calls versus long Puts of various levels and managed at various levels.
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