Video link below: This is some great research by the Tasty Trade team which discusses long term expectancy of buying 80 delta calls vs. selling 30 delta strangles since 2005 on the SPY. Buying calls during up trending markets vastly outperformed the short strangles in the same period, about 4 times as profitable with a 90% win rate. However, as expected, the long call strategy lost a great deal during the down trending periods, taking the overall method negative for the duration of the test. The SPY was up 80% over the testing duration. During the down trending periods, the short strangle, including all the market turmoil of the last decade, vastly outperformed as the calls had 0 winners.
So what is the take away for all environments? The short strangle won 80% in all environments, but took some large losers, which can be managed with spreads or early exits. Even with the upward bias of the last 10 years of the markets, selling the strangles had a higher win rate, and were twice as profitable. Keep in mind the drawdown of these two models would make them untradeable, but the statistics are compelling. Please see the video link below.
As much as i enjoy the personalities of Tasty Trade, Tom continues to be critical of newsletters. Some do need to be criticized, but there are a few select newsletters which outperform the markets and many hedge funds. The GoTradeSignals newsletter posts their entire trade history, delayed, for all to see: http://www.gotradesignals.com/newsletter-information.php
Video link: https://www.tastytrade.com/tt/daily_recaps/2016-07-25/episodes/long-calls-vs-short-premium-07-25-2016
Tags: tasty trade options trading