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The Skinny On Options Data Science

The Data Around Selling Covered Calls

The Skinny On Options Data Science

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 volatility increases on puts it also increases on calls and the recent sharp rise in volatility may have some looking to use a covered call strategy, so we are glad the Doctor is paying a house call to explain the data surrounding this strategy, which underlyings work best and how the strategy performs under different scenarios. Dr. Data (Michael Rechenthin, Ph.D.) is here to keep you on the path of trading health.

Covered call writing is generally profitable. There are times, of course, when it underperforms. What does the empirical evidence tell us and how does it perform under different market scenarios?

A graph of actual volatility (realized) versus implied volatility from 2000 to present was displayed. Realized volatility is usually lower. That aids the covered call strategy.

A table of the percentage of days that implied volatility overstated actual volatility 30 days out on the major index ETFs and the average of all the S&P 500 stocks was displayed. It showed that all implied volatility on these products was overstated. The covered call strategy tends to work better on the index ETFs than on individual stocks.

A study was conducted comparing three different strategies in the S&P 500. Strategy 1 was holding the S&P 500 including all dividends, Strategy 2 was holding the S&P 500 while selling an at-the-money (ATM) call and strategy 3 was holding the S&P 500 while selling an at-the-money call with a 30 delta.

The study tested how the strategies performed under both bull and bear markets. Using various graphs and tables Mike provided us with both the data and put it in context. There was a clear winner under the bull scenario and a different winner under the bear scenario.

Watch this segment of the Skinny on Options Data Science with Tom Sosnoff, Tony Battista and Dr. Data for the takeaways and a solid understanding of covered call strategies and how they perform during both bull and bear markets.

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