Like anything in life, portfolio management is all about constantly optimizing one's approach to match the current trading environment and our unique outlook on the financial markets.

As such, traders need to embrace an attitude of continuous learning - which brings us to today's blog topic - long premium win rates. A recent episode of Market Measures asked the very pertinent question "Is There a Good Time to Buy Premium?"

As most tastytraders already know, historical data indicates that short premium approaches to trading volatility typically produce high win rates. On this installment of Market Measures, the team sought to isolate instances in which it might be preferable to go long premium (i.e. buy options).

Looking at data from 2005 to present in SPY, the Market Measures team ran a backtest that evaluated the success rates of three different long premium strategies. They looked at the performance of these strategies in all environments, and also only occurrences when the VIX was below 15.

The three strategies included in the study were: long straddles, long 30 delta strangles, and long 16 delta strangles (all approximately 45 days-to-expiration options).

As you can see in the graphic below, the best performing long premium strategy over this period was the long straddle. However, the data also revealed that none of the three strategies produced an attractive success rate, on average:

is there a good time to buy premium

Even more interesting than the above information, was the backtest run on instances in which the VIX was below 15. Given that premium is "cheaper" when the VIX is on the lower end of its range, one might hypothesize that a long premium strategy would perform better during these periods.

Interestingly, the data showed otherwise. Using those three long premium strategies when the VIX was below 15 produced even lower win rates across the board, on average.

For each of the three long premium strategies, the win rate went down by about 4-5% when the VIX was below 15.

While numerous market participants probably use long premium strategies successfully, especially as a hedge against their short premium positions, this particular backtest revealed less than optimal results for a plain vanilla approach to long premium in SPY.

We hope you'll take the time to review the entire episode of Market Measures when your schedule allows.

If you have any comments or questions, we hope you'll leave a message below or contact us directly 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.