"Selling premium is alive and well and money continues to pour into these strategies, which means being long options have become relatively cheap." Write Dominick Paoloni and Patrick Hennessy of IPS Strategic Capital. However "the edge has flipped to buying options" as shown in their graph from the beginning of 2018 using ORATS backtesting data.

  • Red line – buying 30d ATM SPX calls, rolled with 10 DTE
  • Blue line – selling 30d ATM SPX puts, rolled with 10 DTE
  • Gold line – SPX covered call strategy, rolled with 10 DTE
  • Green line – benchmark (a delta equivalent amount of the underlying, SPX)

If you can own optionality receiving the benefit of being long gamma with a low carry cost, then you can participate in the markets upside but define your risk to the downside.Using optionality in this way, we have learned that it is possible to achieve the proverbial “have your cake and eat it too”. There are very few long option strategies in the marketplace today that are effectively exploiting this edge and are worth exploring.

ORATS corroborates the IPS findings using a similar study backtesting SPX long straddle that exits with 10 days to expiration and the short variety of this trade.

Since 2018, being long this straddle has out performed being short.

More reading here.

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