Options Backtesting Research

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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Feb 23

Cheap U.S. equity protection through consumer discretionary stocks

Put options on XLY, the main consumer discretionary ETF, are unusually cheap and present an attractive U.S. equity hedging strategy due to its correlation and beta to the S&P 500. Options backtesting analysis at today's pricing shows positive historical returns, which is often unheard of for hedging strategies. These backtesting results are only positive because of how cheap implied volatility is right now on XLY relative to its historically realized moves, even compared to other sectors and macro ETFs.

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Jan 23

Put writing bright spot: CDK Global

With macro implied volatility continuing near recent lows, there are only a few bright spots for put sellers. Our put writing screening technology highlights CDK Global today as having particularly attractive options backtesting results. Click through for the details.

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Jan 17

Netflix Q4 earnings - options traders expect a 10% stock move

Netflix announces Q4 2016 earnings after the closing bell tomorrow, and options traders are expecting a 9.6% move through the end of the week. Over the last two years, the expectations for an earnings move have been in the 10-17% range, so this reading is on the lower end of what has been expected in the past. Since 2010, Netflix has also generally moved more than this 9.6% expectation, leading to positive options backtesting results for buying a straddle going into the announcement.

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Jan 13

Apple call options are the cheapest in 8 years

Apple call options for Q2 expiration are currently trading at their cheapest levels using historical data back through 2009. Apple stock has rallied 9% since the election and broke through a few key resistance levels. If you're expecting the breakout to continue, call options like this trade could be an attractive risk-defined way to play further upside. Options backtesting of this trade shows a 0.57 Sharpe ratio with contained downside risk.

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