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Market Measures

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Call Ratios vs Short Calls

Market Measures

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

We recently made new highs in all three of the the most quoted market averages, the Dow, S&P 500 and Nasdaq. A trader might be tempted to fade the move and sell premium in the form of naked Calls. The problem is that after the market rallies Implied Volatility (IV) tends to be low. A Call Ratio Spread can be an alternative to a short call and there are more ways to make money using this strategy. Our research team went to work to see which strategy performed better.

Our study was conducted in the SPY (S&P 500 ETF). We used data from 2005 to the present. We chose the options with the expiration closest to 45 Days To Expiration (DTE). We compared shorting a Call with a 16 Delta to a 1 point wide Call Ratio Spread in which the credit received was approximately 50% of the 16 Delta Call. The call was managed at 50% of max profit if possible or held to expiration. The Ratio was managed at 100% of the credit received (or about 50% of the call credit) or 200% of the credit received (or about 100% of the Call credit).

A table provided the results for each when managing winners at the levels noted above or held to expiration. The success rate, average P/L and average days held were all noted. Another table then broke down the trades in which we attempted to manage the trades between all occurrences and when IV Rank (IVR) was below 25 (because if we were selling into strength, meaning a rising market, then IVR would tend to be low). Somewhat surprisingly, the P/L rose for all when IVR was below 25 compared to all occurrences. The short Call still had the fewest days in the trade.

For more information on Ratio Spreads see:

Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the detailed results of our study comparing Short Calls to Call Ratio Spreads, both when managing winners and when not and in low IVR environments versus all.

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