The following is a reprint of the market commentary from the July edition of The Option Advisor , published on June But how do SPY options really perform for investors? For those using SPY purely for hedging purposes, the answer to this question might seem irrelevant; after all, the best-case scenario for any insurance policy is that you never need to use it.
But for those interested in speculating on short-term SPY moves via calls and puts, we'll attempt here to determine -- through some significant number-crunching by our Senior Quantitative Analyst Rocky White -- what kind of results traders can expect from different SPY option strategies. When trading an asset with such a wide variety of available strikes and expiration dates as SPY, the number of variables in constructing an options trade can be dizzying.
For the purposes of this study, we narrowed our focus to one-week returns on at-the-money SPY calls and puts, with the hypothetical trades initiated at the close of trading on Friday and exited the following Friday or the last day of the trading week, in the event of a holiday. We then broke down the results to compare "traditional" monthly options returns against their weekly counterparts, to gauge whether one class outperformed the other -- and as such, we ran data back to , which is the first full year of SPY weekly options data.
We further segregated "quadruple witching" expiration weeks -- like the one we just concluded in June -- into a class of their own. It's worth stipulating here that SPY returns during quadruple witching weeks average just 0. Also worth noting are the lagging SPY returns during monthly expiration weeks 0. Diving into the options data itself, SPY call buying is a fairly dismal approach during quadruple witching week. The average at-the-money SPY call option return of a And this divergence doesn't appear to be a function of pumped-up implied volatility IV heading into quad witching, either.
Given this notable call option underperformance, can we conclude that selling SPY calls every quadruple witching expiration week is a "no brainer"?
Per the table below, it does seem that the quarter-end expiration week is the best time to implement a one-week SPY call selling strategy. The average positive return is the lowest during quad witching week by a very slim margin, but the average negative return is also the smallest -- yielding a net average return of 0. As for SPY put buying, it's a similar scenario to the call buying outcomes detailed above. That said, when SPY puts pay off, they pay off big. For traders with high conviction that SPY will sell off during the course of any given week, a short-term options trade can be quite profitable.
Finally, in terms of both win rate and average return, SPY put sells offer the best odds for short-term options traders. What's more, the average returns on at-the-money SPY put sells consistently outpace comparable returns on SPY call sells.
For those traders who prefer a high win rate in exchange for modest overall returns, a SPY put selling strategy typically fits the bill. Of course, the appropriate SPY options strategy will primarily depend upon the technical outlook for the ETF over the time frame of the trade. And that's where it's important to remember that, due to its outsized popularity among options traders, SPY is highly susceptible to the influence of heavy call and put open interest strikes -- particularly during monthly expiration, when open interest accumulations are often at their largest.
Accordingly, any trader considering a short-term SPY trade would do well to include a careful analysis of the fund's relevant open interest configuration before opening a short-term options trade -- whether it's a purchased put, a sold call, or any alternative in between.
Let's Get Started Now! Get answers to your questions regarding transfer fees, commission rates, programs and available discounts related to online trading services. About Schaeffer's Research Legal Notices. A SPY put selling strategy is consistently profitable, but purchased put options offer bigger average returns. Published on Jun 27, at 1: Pinpointing the most reliable and most profitable short-term SPY trades. Most Active Weekly Options. Most Active Options Update.
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