This segment reveals the results of a study comparing trading longer duration cycles to shorter duration cycles in low IV environments using the S&P 500. The results are enlightening.
The VIX has traded below 15 about 33% of the time since 1990. It has been below 15 more often than usual recently. This was displayed graphically.
We have a choice when the VIX is low (below 15). The expirations are usually in contango. A table featuring the SPY (S&P 500 ETF) showing a classic contango (back month higher than the front month) was displayed. The table included the expiration, days to expiration (DTE) and implied volatility (IV) on both the November 2015 SPY options and the February 2016 SPY options.
There are increased risks in trading the farther out expirations. The risks are listed. Do the rewards outweigh the risks? A study was conducted using the SPY (S&P 500 ETF) from 2005 to present. On the first trading day of the month we sold a 1 standard deviation (SD) strangle nearest to 45 days to expiration (DTE) as well as a 1 standard deviation strangle nearest to 100 days to expiration (DTE) when the VIX was trading below 15.
A table of the comparison between the two 1 standard deviation strangles when the VIX was below 15 was displayed. The table included the profit/loss, average trade P/L, percentage profitable at expiration, max loss and average loss.
A graph of the VIX versus profit levels on 45 DTE 1 standard deviation strangles was displayed. Another graph of the VIX versus profit levels on 100 DTE 1 standard deviation strangles was displayed. There was a greater variance in the longer cycle. A final table compared the 100 DTE 1 standard deviation strangle to the 45 DTE 1 standard deviation strangle when the VIX was trading above 15.
Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the takeaways and other important information comparing longer duration option cycles (100 days) to shorter duration option cycles (45 days) during lower implied volatility environments.