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Straddles on ETFs vs Stocks

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.

The Best Practices from July 13, 2016, Options on ETFs vs Their Holdings examined the choice between trading an ETF versus the individual stocks in the ETF. The Implied Volatility (IV) and Implied Volatility Rank (IVR) are lower in the ETF but the individual stocks had less liquidity, had greater outlier moves and were more affected by news, such as earnings. What about short Straddles on ETFs versus their stock holdings? Which performed better?

Frank, one of our research team members, joined the guys to help explain the study and the results. Our study was conducted in QQQ (Nasdaq 100 ETF) and four of its largest components, MSFT, FB, AMZN and AAPL, from 2005 to the present. We sold Straddles to compare performance. We also compared holding the Straddles to expiration or managing our winners at 25% of the credit received if possible (or holding to expiration). A table of the Straddle prices on QQQ, AAPL, AMZN, FB and MSFT was displayed. The table included the credit as a percentage of the stock price. The table showed that AMZN had the highest Straddle credit and also the highest credit as a percentage of the stock price. The credit received as a percentage of the stock price was the method in which we all the P/L statistics.

A results table of the Straddles held to expiration showed that the QQQ ETF had the highest average P/L (5% of the average credit received) and the smallest loss as compared to the individual stocks. A second results table showed that by managing winners we were able to improve all the metrics dramatically and the bottom 25 percentile P/L went from all being well negative to all nicely positive except for AMZN. Frank mentioned that leaving on a trade to expiration dramatically increases your Gamma risk.

Watch this segment of Market Measures with Tom Sosnoff, Tony Battista and Frank from the research team for the valuable takeaways and the results of our study on selling Straddles in an ETF versus some of its largest components and also how managing winners affects performance.

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