Options Trading & Analysis

Trading Options in the S&P 500


The S&P 500 (^GSPC) is up 28% over the last three-years and 17% over the last year, but an option strategy that has invested in the index simply not "going down a lot," has yielded over 220% returns and further yet, has been successful over three-years, one-year, one-year and even the last six-months.

 

S&P 500 (^GSPC) Index Options
Selling put spreads in the index options is a natural tack when looking to benefit from a bull market, but with an eye on making greater returns as long as the market doesn't tumble out of control. First we examine which put spreads have worked the best -- trading monthly options.



If you're reading this on a mobile device, that image is going to be hard to read, so we'll spell it out in a table, below:

50 delta: 176%
40 delta: 233%
30 delta: 217%
25 delta: 195%

So, we have a basic framework in place where we can focus on selling the 40 delta put -- a little bit out of the money (50 delta means at the money), and now we can try various put spreads in this area.



Now we can see that the 40/15 delta short put spread in S&P 500 (INDEXSP:.INX) index options has returned a whopping 233% return, again, while the index is up just 28%.

Here's a return chart with the index in gray and the short put spread in orange.



Is This Really Analysis, or Just Luck
Skepticism is natural -- trading isn't a game and that means we have to prove to ourselves that this isn't luck or happen stance.

What we need to do now is look at this short put spread over various time periods. We see that it has worked over the last three-years, now let's look at the last year:



It's not a magic bullet -- it's just easy access to objective data.

The short 40 delta put spreads have returned between 112% - 115% in the last year with the index up about 17%. But, we can also look at the number of winning and losing trades.

Over the last year we see 11 profitable short put spreads and 2 losing spreads, for an 84.6% win rate. For the careful option trader we can see that we have edge here.

A 'delta' is roughly a measure of probability -- so a long 40 delta put should be in the money about 40% of the time. In our case, selling a 40 delta put should end up in the money 60% of the time. But, instead, we see an 84.6% win rate -- that's actually huge edge -- quite unusual in a broad based index.

When we look at this short put spread in the S&P 500 over the last six-months, these are the results:



We see 7 winning trades with 0 losing trades, so a 100% win rate, and a 71.8% - 78.5% return depending on the spread that was sold. For context, the S&P 500 (INDEXSP:.INX) has been up 12.2% in the last six-months.

What Just Happened
This is how people profit from the option market — it's preparation, not luck. We had a hunch -- we checked it cross various strikes -- we honed in on the sweet spot -- we verified the results across all the time frames -- we found edge. That's it.

It doesn't mean this is going to work in the future, but what it does mean is that of the S&P 500 doesn't collapse, we have a very good idea of which options to trade and a strong conviction that there could be edge there. That edge has led to 6x returns in the last six-months and about 9x returns over the last three-years.

To see how to do this for any stock, ETF or index, the S&P 500, and for any strategy, with just the click of a few buttons, we welcome you to watch this 4-minute demonstration video:
Tap Here to See the Tools at Work

Thanks for reading.

Risk Disclosure
Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.

Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.


About Ophir Gottlieb


Mr. Gottlieb writes financial news for CML and also as a contributor to Yahoo! Finance, CNN Money, MSN Money, and before then for Marketwatch, Business Insider, TheStreet and Real Money. He has become a staple in financial TV, often times seen on the Business News Network and CBC. Mr. Gottlieb's experience includes working as an option market maker on the NYSE ARCA exchange floor (CBOE remotely), as Managing Director of Client Services and Algorithmic Trading for Livevol, Inc, and as the Managing Director and Product Manager of Quantitative Research for GMI (now MSCI). Ophir Gottlieb is inventor of the Forensic Alpha Model (FAM) and a co-inventor of Accounting and Governance Risk Model, both purchased by MSCI. FAM has been a celebrated achievement in artificial intelligence and quantitative finance that was introduced to world by the Rotman International Journal upon its completion. Mr Gottlieb's mathematics, measure theory and machine learning background stems from his graduate work at Stanford University and his time as an option market maker on the NYSE and CBOE exchange floors. He has been cited by various financial media including Reuters, Bloomberg, Wall St. Journal, Dow Jones Newswire and through re-publications in Barron's, Forbes, SF Chronicle, Chicago Tribune and Miami Herald and is often seen on financial television.

Author's web site: http://bit.ly/2mnZAmV


View Ophir Gottlieb's post archive >

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The Options Insider Radio Network

The Options News Rundown

Your source for the most important news and information from the world of options.

The Options News Rundown

The Options Insider Radio Network

All of our radio programs in one convenient place.

The Options Insider Radio Network

Options Insider Radio

The original options podcast. Features interviews with leading options figures.

Options Insider Radio

The Option Block

This high-octane program features education, analysis, strategies and unusual activity.

The Option Block

Volatility Views

The premier radio program for volatility traders.

Volatility Views

The Long And Short Of Futures Options

Your source for futures options information.

The Long And Short Of Futures Options

The Advisor's Option

Arming advisors with the info necessary to manage risk.

The Advisor's Option

Options Boot Camp

Get into peak options trading shape.

Options Boot Camp

Options Insider Special Events

Compelling panel & special event recordings from the options world.

Options Insider Special Events

OIC's Wide World of Options

A dynamic mix of current events, investor resources, & strategy insights.

OIC's Wide World of Options

Trading Tech Talk

We break down all the amazing technology that takes your trades from the click of a mouse to the clearinghouse.

Trading Tech Talk

Options Playbook Radio

Break down cutting-edge options strategies and learn how to incorporate them into your portfolio

Options Playbook Radio

Options Oddities

We track all the unusual options trading activity on Options Oddities.

Options Oddities

This Week in Futures Options

The program designed to help active futures options traders stay on top of this ever-changing marketplace. 

This Week in Futures Options

The Business Show

If you like business, if you like humor, if you like stock symbols, this is the podcast for you.

The Business Show