The price of the underlying stock is one of the largest contributors to an option’s price. Since different underlyings have different price levels we cannot compare average performance of the same strategy across underlyings. One way to normalize for differences in the underlying price and compare strategy performance is to divide the P&L by the trade credit. In this piece, Liz, Tony and Beef compare the performance of strategies across products to create an estimate for trade profitability.The Study:
- SPY IWM TLT EEM
- 2005 – Present
- 45 Days to Expiration, Managed at 21 DTE
- ATM Puts
- 16 Delta Strangles
- Divided Each P&L by the Initial Credit
The average P&L as a percent of the trade credit is fairly constant across four different products and taking the average of each a trader can estimate their profits from certain strategies. The average profit as a percent of the trade credit is 15%, 8% and 21% for ATM puts, straddles, and 16 delta strangles.