OAP 063: Track Option Strategy Performance With These 27 Indexes From The CBOE

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A little over a year ago now the CBOE released its first round of options-based strategy performance benchmark indexes. Since, they’ve slowly increased the number of trackable option strategies on their website. Each strategy index is "designed to highlight the long-term utility of options as risk management and yield enhancing investment tools” and really helps bring some context to options trading for the little guys like you and me.

In today’s show, I’ll highlight some of the more interesting strategy based index performance metrics I know will help you in your options trading journey. This includes; SPX Covered Combo Strangle, VIX Tail-Risk Hedge, SPX Protective Puts, and the SPX Monthly vs. Weekly Put Selling showdown. Plus, I’ll give you a little more information on some the options backtesting we’ve been doing here at Option Alpha and the up-coming release of our proprietary backtesting software soon.

CBOE S&P 500 Iron Condor Index (CNDR)

  • Designed to track a hypothetical iron condor.
  • Sell monthly out of the money S&P 500 put options at about the 20 Delta, and then roughly an S&P 500 out of the money call option at about 20 Delta.
  • Then buy the 5 Delta on either end — the long legs on either end.
  • Repeat monthly or 12 times out of the year, designed to keep the neutral iron condor going every single month.
  • Results: does not work that well on a long-term basis. Dramatically underperforms the S&P 500.
  • At Option Alpha we back-tested this similar strategy but used a daily condor instead of monthly.
  • Found that if you increase the frequency and decrease the trade size, performance was four times greater than the regular iron condor on a monthly basis.

CBOE S&P 500 Covered Combo Index (CMBO)

  • A long position in the S&P or SPY, hypothetically entering another short strangle overtop of that.
  • Selling the 2% out of the money call option, and an at the money put option — combining the PutWrite and CallWrite strategies in S&P 500 to create a combo covered index.
  • Do it on a monthly basis, and roll the contract from month-to-month.
  • The combo performance is dramatically better than some of the iron condors, and some of the iron butterflies strategies they have.
  • Still not at the level that just the pure covered call is at — requires a lot more premium to hold that position, so you have to recalibrate the returns.
  • Definitely, a strategy that saw much less overall volatility in its returns.
    Although it did not make as much money as the S&P 500 covered call did, it had a much smoother equity curve.

CBOE S&P 500 Weekly PutWrite Indexes (WPUT) & Monthly PutWrite Indexes (PUT)

  • Tested the PutWrite Index for the S&P 500 and the Russell. Tested a weekly contract, rolling every week versus a monthly contract rolling every ] week.
  • Found that the annual premium income collected was 24% of the equity price for the monthly put options and 39.3% on an annual basis for the weekly options.
  • The weekly put options, although they were smaller, collected a lot more of aggregate premiums. The sum premiums of the four weekly put options produced a higher aggregated amount.
  • Comparing long-term performance for the monthly put options versus the weekly put options, the monthly put options performed better — the monthly put options returned 6.59% annual compound rate and the weekly put options returned 5.61%.
  • This means that the weekly option collected more money but the monthly put options kept more money over the long-term.
  • When you start to factor in commissions for trades, one trade per month is better than four trades per month.
  • Standard deviation or volatility risk in the portfolio for the monthly put options was 11.51% and 9.85% for the weekly.
  • Volatility for the S&P 500 on average was 15.11%, so in either case, you have less volatility than the market and a smoother equity curve.
  • However, there was a larger drawdown at it's largest point — no weekly options to average out the draw-downs.

CBOE VIX Tail Hedge Index (VXTH)

  • Designed to simulate buying and holding the S&P 500, and then buying a one-month 30 Delta call option on the VIX and keep producing the 30 Delta call options.
  • This is to protect your portfolio of the tail risk of a huge black swan event.
  • Theoretically, if the black swan event happens there will be a huge spike in volatility and the call option will make a lot of money to protect the downside exposure in the S&P 500.
  • The S&P 500 dramatically out-performed buying this continuous protection for your portfolio on a re-occurring basis.
  • The protection helped during certain periods of time by buffering the portfolio during a market crash or downturn.
  • But the constant reoccurring purchase to buy calls every month on the VIX actually dramatically reduces your performance.
  • Over a 5-year period, the VIX tail hedge produced a return of 43.74% versus the S&P 500 at 68.12%. This disparity is the cost of insuring your portfolio — have to give up something to insure your portfolio against the downside risk (see episode 49 for best strategies for buying put options into a crash).

CBOE S&P 500 5% Put Protection Option (PPUT)

  • Designed to track the performance of a long S&P 500, and also buys a monthly 5% out of the money put option on the S&P 500 as a hedge — generic put protection for your portfolio.
  • Using the Put Protection option, your portfolio makes $664 on a $100 investment. Doing a simple covered call instead, you would have made $2,096 per $100 invest — huge disparity in performance.
  • The Put Protection option creates a cost center for your portfolio, an insurance charge that dramatically reduces your returns long term.

Overall, you have to determine the most important metrics to you personally as a trader when making strategy decisions: win-rate? Draw-down? Equity curve? Growth?

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Free Options Trading Courses:

  • Options Basics [20 Videos]Whether you're a completely new trader or an experienced trader, you'll still need to master the basics. The goal of this section is to help lay the groundwork for your education with some simple, yet important lessons surrounding options.
  • Finding & Placing Trades [26 Videos]Successful options trading is 100% dependent on your ability to find and enter trades that give you an "edge" in the market. This module helps teach you how to scan properly for and select the best strategies to execute smarter option trades each day.
  • Pricing & Volatility [12 Videos]This module includes lessons on mastering implied volatility and premium pricing for specific strategies. We'll also look at IV relativeness and percentiles which help you determine the best strategy to use for each and every possible market setup.
  • Neutral Options Strategies [7 Videos]The beauty of options is that you can trade the market within a neutral range either up or down. You'll learn to love sideways and range bound markets because of the opportunity to build non-directional strategies that profit if the stock goes up, down or nowhere at all.
  • Bullish Options Strategies [12 Videos]Naturally everyone wants to make money when the market is heading higher. In this module, we'll show you how to create specific strategies that profit from up trending markets including low IV strategies like calendars, diagonals, covered calls and direction debit spreads.
  • Options Expiration & Assignment [11 Videos]Our goal is to make sure you understand the logistics of how each process works and the parties involved. If you don’t feel confident in the expiration processes or have questions that you just can't seem to get answered, then this section will help you.
  • Portfolio Management [16 Videos]When I say "portfolio management" some people automatically assume you need a Masters from MIT to understand the concept and strategies - that is NOT the case. And in this module, you'll see why managing your risk trading options is actually quite simple.
  • Trade Adjustments/Hedges [15 Videos]: In this popular module, we'll give you concrete examples of how you can hedge different options strategies to both reduce potential losses and give yourself an opportunity to profit if things turn around. Plus, we'll help you create an alert system to save time and make it more automatic.
  • Professional Trading [14 Videos]Honestly, this module isn't just for professional traders; it's for anyone who wants to have eventually options replace some (or all) of their monthly income. Because the reality is that mindset is everything if you truly want to earn a living trading options.

Option Trader Q&A w/ Preshad

Trader Q&A is our favorite segment of the show because we get to hear from one of our community members and help answer their questions live on the air. This week's question comes from Preshad who asks: How does margin interest get applied and when does it impact your portfolio?

Remember, if you’d like to get your question answered here on the podcast or LIVE on Facebook & Periscope, head over to OptionAlpha.com/ASK and click the big red record button in the middle of the screen and leave me a private voicemail. There’s no software to download or install and it’s incredibly easy.

PDF Guides & Checklists:

  • The Ultimate Options Strategy Guide [90 Pages]: Our most popular PDF workbook with detailed options strategy pages categorized by market direction. Read the whole guide in less than 15 mins and have it forever to reference.
  • Earnings Trading Guide [33 Pages]: The ultimate guide to earnings trades including the top things to look for when playing these one-day volatility events, expected move calculations, best strategies to use, adjustments, etc.
  • Implied Volatility (IV) Percentile Rank [3 Pages]A cool, simple visual tool to help you understand how we should be trading based on the current IV rank of any particular stock and the best strategies for each blocked section of IV.
  • Guide to Trade Size & Allocation [8 Pages]Helping you figure out exactly how to calculate new position size as well as how much you should be allocating to your each position based on your overall portfolio balance.
  • When to Exit/Manage Trades [7 Pages]Broken down by option strategy we'll give you concrete guidelines on the best exit points and prices for each trade type to maximize your win rate and profits long-term.
  • 7-Step Trade Entry Checklist [10 Pages]Our top 7 things you should be double-checking before you enter your next trading. This quick checklist will help keep you out of harms way by making sure you make smarter entries.

Real-Money, LIVE Trading:

  • IWM Iron Butterfly (Closing Trade): Exiting this IWM iron butterfly options trade gave us a $1,100+ profit after pinning the stock price one day before expiration at the peak of our spread.
  • CMG Iron Condor (Opening Trade): I just recorded my live trading platform (and real money account) as I walked through the process of entering a new iron condor trade in CMG stock. Inside you'll see me analyze, price and fill the trade in real-time.
  • APC Strangle (Closing Trade): Took about $150 out of this small APC strangle trade even after the stock moved completely against our short call strikes this month. But as always, implied volatility always trumps direction and because IV went down, the value of this spread dropped more-so than the impact of the directional move higher.
  • IYR Call Credit Spread (Adjusting Trade): This adjustment is good for 2 reasons. First, it reduces the overall risk in the trade if IYR continues to move higher. Second, it still leaves room for the stock to fall back down into our new profit window.
  • XHB Straddle (Closing Trade): We were able to bank a $120 profit early in the March expiration cycle for our XHB straddle with the stock trading right in the middle of our expected range.
  • AAPL Call Calendar (Opening Trade): Look behind the scenes as I use our new watchlist software to filter quickly and find this AAPL call calendar spread trade during overall low implied volatility in the market.
  • COF Strangle (Adjusting Trade): Here I recorded my live trading screen (and real money account) showing you the entire thought process we used to make an adjustment to my current short strangle in COF to reduce risk.
  • GDX Strangle (Opening Trade): With gold's high IV we are getting into a new strangle with a 70% chance of success and a decent credit for selling option premium.
  • IBB Iron Condor (Closing Trade): Today we're exiting an iron condor we traded in IBB for a $142 profit. Inside you'll see me analyze the exit price and fill the trade in real-time.

Thank You for Listening!

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About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.