Options Backtesting Research

Aug 2

Apple call buying points to even more upside expected by options traders

There was a large buyer of $210 strike Apple calls prior to the earnings release when Apple was at $190, and traders are continuing to pile into these options today even after they've increased 4x in value. A backtest of this trade shows significant positive historical expected value. Options traders are positioning heavily for more upside in Apple over the next few months.

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Jun 10

Put writing bright spot: Match Group

It seems unlikely that Facebook's new dating feature will dent Match Group's empire in only a few months. This is why we think short-term put writing on Match (MTCH) is an unusual bright spot in today's market. Selling 10% out of the money puts will collect 6% of the underlying price with a 94% backtested historical success probability. The downside risk of purchasing shares at a cost basis of 16% below the current market price is also an attractive prospect but is only a 6% historical chance.

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Mar 15

Financial ETF call options are attractive for those anticipating higher rates

Call options on the XLF Financials ETF are seeing higher volume than usual as traders are anticipating higher interest rates to increase equity values in bank stocks. These call options are currently trading near their median value over the past several years, making them a comparably inexpensive way to play the knock on effects of higher interest rates on equities.

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Feb 23

Equity hedgers should look to VIX call spreads

VIX call spreads are currently an inexpensive way to hedge equity declines for those expecting elevated price volatility to continue. While backtesting shows that these call spreads do not make money the majority of the time, they have historically returned 20x the premium paid in times of market stress.

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Nov 16

Dow Jones risk reversals offer significant upside leverage

Risk reversals on the Dow Jones ETF DIA are currently offering significant upside leverage with downside risk that is virtually the same as owning stock outright. Options prices are currently exhibiting such high skew that Q1 2018 call options are 70% cheaper than similar put options. A backtest of this options strategy shows an 82% probability of profit with significant returns if U.S. equities continue to rise.

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Aug 6

Equity hedging through cheap gold call options

Since the beginning of July, gold has rallied 5% from $1200/oz to $1264/oz while its implied volatility continues to drop to historic lows. Straddles on gold imply a 4% move in the precious metal over the next three months, a 1st percentile occurrence over the past nine years. Those looking for market hedges can take advantage of the negative correlation between gold and equities with cheap gold call options. Options backtesting shows this trade has a positive average return, a very rare occurrence for a hedging strategy.

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Jun 22

The cheapest S&P 500 straddles in 10 years

Implied volatility on the S&P 500 is at its lowest level since 2007, and three-month straddles break even after only a 4% move in either direction as a result. Backtesting shows that the S&P 500 exceeds this move 60% of the time since 2000.

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Apr 6

Mid-cap equity call spreads are unusually cheap

Steep call skew in the MDY U.S. equity mid-cap ETF has created call spread opportunities which are unusually inexpensive to purchase. Options backtesting and risk analysis shows historical positive returns with attractive probabilities of success with limited downside exposure compared to owning shares outright.

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Mar 24

XBI put volume explodes 5x above normal

Options traders are betting on biotechnology declines over the next two months in large size. With XBI implied volatility at three year lows, the put options selected by these traders are historically inexpensive. But like most hedging strategies, they have negative options backtesting results as they generally lose money over long time horizons. The maximum historical payout for these hedging trades would be 6x premium paid.

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Mar 21

Options traders expect a 5% Nike price move after earnings

Options traders are pricing in a 5% move in Nike's stock after they report earnings tomorrow. This is nothing unusual as options traders have priced in an earnings move within the tight range of 4-6% since 2012. Options backtesting shows that selling volatility in advance of their earnings has generally only been a mildly profitable strategy.

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