Does Selling Options Still Pay Off?

On reading Dominick Paoloni and Patrick Hennessy’s article on selling options from the blog at IPS Strategic Capital I decided to research the subject.

Their article states that "the edge has flipped to buying options" as shown in their graph from the beginning of 2018 using ORATS backtesting data.

• Red line – buying 30d ATM SPX calls, rolled with 10 DTE
• Blue line – selling 30d ATM SPX puts, rolled with 10 DTE
• Gold line – SPX covered call strategy, rolled with 10 DTE
• Green line – benchmark (a delta equivalent amount of the underlying, SPX)

Their article uses long calls and put writing, but what are the results with buying and selling the straddle? A straddle is the simultaneous buying of calls and puts on the at-the-money strike.

The Backtest:

We test the SPX straddle with 30 days to expiration and exit with 10 days to expiration. We test for the period of January 2018 to the present.

The Results:

ORATS backtest on buying straddles corroborates the IPS findings on buying calls. Buying straddles from 2018 to the present returns an annualized return of 3.36% compared to selling straddles returning -4.25%, the difference attributable to slippage and commission assumptions.

Moreover, we compare the returns of buying straddles from 2007-present, returning -6.24%, to buying straddles from 2018-present, returning 3.36%.

To summarize, since 2018, the long straddle has outperformed being short, and has dramatically outperformed the long straddle strategy since 2007.

More reading here.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.