A Simple Options Trading Strategy That Beats the S&P 500
NEW YORK (TheStreet) -- It can be a winning strategy to sell uncovered or unhedged at-the-money short-term puts, then wait until maturity and repeat the trade. Investors comfortable with the risk of equities can beat the index in the long run by exploiting a flaw in the classical option theory. Note that with the levered strategy below you can theoretically lose more than the capital invested -- think about it carefully.
The strategy is to sell unhedged at-the-money short-term puts on the S&P 500
So why tell you this? I can hardly think of anything simpler. That's why I don't feel I'm revealing any substantial trade secret.
- It outperforms the S&P 500 in the long run, in terms of return and risk.
- It exploits a flaw in classical option pricing theory.
|Figure 1. Monthly strategy (blue line) vs. S&P 500 (red)||Figure 2. Weekly strategy vs. S&P 500|
|Data sources: Large investment bank, Bloomberg. For the period 1994-2004, the one-week at-the-money implied volatility was estimated through a linear regression against one-month implied and 10-day historical volatilities.|
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