The biggest banks have some bullish estimates for where the market will end the year. Looking at the deltas of these forecasts, bank estimates have a low likelihood of realization. This led us to ask, how would performance look if we went long stock as compared to selling strangles?The Study:
- S&P 500 (SPY)
- 2005 - Present
- Compared long 100 shares of SPY to short 1 16 delta strangle in SPY.
- Average Monthly Profitability
- Standard Deviation of P/L
When we equate the capital usage of long 100 shares of SPY to 1 16 delta strangle in SPY, we find that although the risks and rewards are similar, the probabilities greatly favor the strangle.