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Market Measures

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Long Term Buying Power Risk

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.

When a trader initiates a short premium trade, they use cash or margin from their portfolio to secure the position. This is known as the buying power for a required trade. Each trade requires a different amount of buying power depending on factors like the underlying price, how far out of the money, etc. Unlike long stock positions in a portfolio, option sellers face the potential for buying power expansion as the underlying price changes.

Since those buying power amounts change through time, the Research Team decided to investigate how buying power requirements look historically for short puts and calls.

The Study:
  • SPY
  • 45 Days to expiration
  • 2005 – Present
  • 16 Delta Puts & Calls
  • Continuous Exposure to One Contract
  • Compared the Buying Power Expansion Risk of Holding to Expiration & managing at 21 Days.
Results:

Using our traditional management philosophy of closing at 21 days we can greatly reduce the potential for buying power expansion of both short puts and short calls. Short calls, which have historically been tested more frequently than short puts, saw tremendous decreases in buying power risk when managed at 21 days.

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