When taking a directional shot, which strategy should we employ: long or short options? We do a backtest to find out the difference in performance between long and short options historically.
We find that for a bullish strategy, a short put has greatly outperformed a short call. For bearish strategies over the recent bull market, the long put lost greatly while the short call broke even. This implies that by using short options you can still be profitable or break even when directionally wrong. Even if you are directionally right (in the case with long calls) you still lose on the time decay component of the option, making the short options plays be more profitable in both bearish and bullish scenarios.