U.S. utilities implied volatility spikes, delta hedged straddles attractive

Aug. 30, 2016

Options Backtesting Results

Historical average return: +$227.72 (backtested over 7.6 years)
Historical success probability: 69.6%


U.S. utilities (XLU) implied volatility has risen from the 24th percentile to the 70th percentile over the past few weeks in advance of an expected interest rate hike next month. Options traders are expecting a nearly 4% move in the sector after the Fed meeting on September 21st. At today's elevated pricing, an options backtesting analysis of selling straddles delta hedged shows a 70% probability of success with a 0.32 Sharpe ratio.

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