Market Measures

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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.

Is one product better to trade than another? There are many products out there to choose from, but in terms of risk and return, is there a superior product that you can trade i.e. one that gives you more return with less risk?

  • SPY and IWM, 2006 through 2018 (13 years)
  • Sold 16 delta strangles in both
    • 1.85 (theoretical) contracts in IWM
    • 1 contract in SPY
  • 45 DTE in both
  • Held to expiration for both
  • Recorded:
    • Win Rate, Average P/L, Volatility of Ending P/L

The reason for selling 1.85 contracts in IWM vs 1 in SPY is because the average buying power reduction for IWM strangles is 1.85 times that of SPY strangles. In order to have an apples to apples comparison, we need to adjust size to have the same buying power.

First, we find that the win rates of the two strategies are identical. Additionally, the average IV of IWM is 33% greater than SPY, and interestingly enough, P/L is 34% greater for IWM, and risk is 37% greater for IWM. These results suggest that the theoretical risk-return (as indicated by IV) matches the actual risk-return almost perfectly. Markets are priced extremely efficiently, and there is no risk advantage to trading one product over another. With more profit, you will take more risk.

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