tastytrade Market Measures: Recent Episodes
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It's not always easy to take the measure of a market, whether you've been trading for a day or a decade. On this segment we look under the hood—options probabilities, volatility, trading strategies, futures, you name it—so your trading mechanics are built to manage more winners.
How does maximizing occurrences level out risk in a portfolio?
Maximizing the number of occurrences brings total results closer to what is expected statistically.
This leads to greater consistency in both P/L and win rates. tastytrade explains with a 15 year analysis.
The chance of a complete reversal in the market after a 2% or greater daily move in either direction is just 1% (over 20 years).
The chance of a reversal after a selloff is twice as likely as a reversal after a rally of the same size.
Since the chance of a 2%+ close is 9%, and the chance of a 2%+ move and reversal that same day is 1%, then for every nine 2%+ closes, expect to see one 2%+ move followed by a reversal.
Tune in as Tom and Tony utilize this information, applying it to recent market activity.
Yesterday SPY dropped by roughly 3.8% and the VIX spiked by nearly 32%.
However, when SPY dropped by 3.3% in late February, the VIX spiked by 47%.
And when SPY dropped by 3.3% in early March, the VIX only jumped by 24%.
Since IV tends to be highly inversely correlated with the underlying, we expect movements in the underlying to inversely scale with movements in IV the majority of the time.
However, movements in IV are highly dependent on market context, and today Tom and Tony are going to explore that in more detail.
NASDAQ’s price and IV have become much less inversely correlated over the last three months...dropping from its long term correlation of -0.75 to a much weaker -0.42.
Compared to the last ten years, the last three months have observed roughly twice the probability (on daily and weekly intervals) where both the NASDAQ and its IV go up together.
Soon a selection of cryptocurrencies will be available on the tastyworks platform.
Today we will dive into some statistics around one of the most popular cryptocurrencies, Bitcoin (BTC).
Join Tom and Tony as they look at correlations, historical volatilities, and the ideal ratio of BTC to SPY for gaining BTC exposure with minimal portfolio volatility.
Since this March, we have seen an increasing number of underlyings that have one-sided movement.
So, we may wonder how often and how quickly should we expect to see reversals after these extreme moves?
Tom and Tony examine a study done by the Research Team to see how common these occurrences can be. Tune in to see how duration can impact the results.
Contrary to popular belief, in AAPL’s case, stock splits do not at all provide any indication of future performance. Any post-split performance that deviates from the stock’s long term average cannot be immediately attributed to split unless there are a). a lot of split occurrences and b). a statistically significant deviation from its average (at least two standard deviations). In AAPL’s case, there was neither.
Premium sellers prefer to collect theta, but with risk-defined trades, we can sometimes experience negative theta.
Today, Tom and Tony discuss the theta of Iron Condors with various wings and its impact on P/L.
The day of the first outlier move experienced in the market, expect to have a loss that is roughly 15% of the total credit received of your strangle.
However, on average, trades that had outlier price moves in the underlying were more profitable because outliers tend to cluster, and thus options become priced to anticipate more outliers.
The key is to stay small before the first outlier move (when IV is low) in order to take advantage of the higher premiums that follow.
Compared to equities, options are subject to additional risk factors (e.g. IV, time decay) that add diversity to equity portfolios.
However, in the long term how correlated are actively managed strategies with regards to one another?
Today Tom and Tony look at the long term correlation between option strategies to learn more about diversifying option portfolios.
Because of the Central Limit Theorem, we have an answer of how much variability we can expect between our average P/L and the long term average based on our number of trades we made.
The more trades we make, the more likely our average P/L is to be closer to the long term historical average of all trades, i.e. less uncertainty.
To approximate the probability of touch, simply multiply the probability of expiring ITM (the delta) by 2.
This formula is based on when the trade expires.
In today’s segment we will dig deeper and run a study to determine how many days on average it takes to touch. Watch to find out the results they may surprise you.
Converting a naked option to a spread can reduce our Delta exposure. Does this reduced Delta exposure for spreads persist through the life of the trade? Today, Tom and Tony discuss the Delta exposure of the Spreads
One advantage of vertical spreads is they are smaller trades than naked positions and the narrower the spread the lower the buying power requirement.
New traders may be misled by the lower buying power of tight vertical spreads relating to lower risk, but when comparing these differently sized trades, it’s important to normalize by this buying power amount. One way to compare these trades is to look at the return on capital.
By taking an active approach to investing, you are able to learn about risk, opportunity, and decision making.
Historically, the risk and returns from an actively managed portfolio have outperformed a simple buy and hold strategy.
An active options portfolio is estimated to grow much faster and with more certainty than a buy-and-hold portfolio.
Short premium positions are most profitable in high IV environments, and we trade IVR > 30 as a rule of thumb to ensure this.
However, if IVR becomes skewed to the upside or downside, it might not accurately represent premium selling conditions.
Today Tom and Tony discuss what happens if we trade using SPY IV instead of IVR, in an attempt to avoid IVR skew.
Some pairs have correlations that are mean reverting. In this study we focused on IWM-QQQ. If a pair has a mean reverting correlation, it does not mean that the pair price itself will mean revert. Trading a pair with high correlation means a pair with less overall risk. With the Russell-NASDAQ pair at a historically low correlation, the risk of trading that pair now is rather high. However, since their correlations seem to mean revert, the risk (volatility) of that pair in the near future may decrease.
Like IV Rank, Skew Rank has the potential to determine the current situation for extremes. The question is, which one is more powerful? Today, Tom and Tony discuss the difference between using IVR and SKEW index.
Previous SPY conditional probability studies have shown that consecutive up-days are not strongly predictive of future up-days.
However, what about conditional probability around volatility? Are consecutive IV up- or down-days predictive of future behavior?
While consecutive volatility down-days do not have predictive power for future down-days, with more consecutive volatility up-days, future consecutive up-days become less likely.
Iron condors with wider wings more closely represent strangles while lowering the buying power requirement.
In the worst case, we can assume max loss for tight iron condors, does this hold true for wider spreads? Join Tom and Tony today as they dig deeper.
On Friday’s new Skinny on Quantitative Finance, we discussed how the tastytrade view of market efficiency is somewhere between the semi-strong and the strong version of the Efficient Market Hypothesis.
In other words, risk and return for a particular trade cannot be manipulated, only understood and managed accordingly.
This study shows how the above statement is true on strategies on liquid underlyings that are diversified (ETFs) over the long term.
A Stop Loss is a strategy meant to reduce risk in stock trading. But we know managing losses at a big target (like 2x of the original credit received) doesn’t seem to work well. What about incorporating a smaller target to further control the downside risk? tastytrade investigates.
Options decay differently depending on whether they are at-the-money or out-of-the-money. ATM options decay faster after the 21 DTE mark, but they have more gamma risk, which we prefer to avoid. OTM options actually decay much less after the 21 DTE mark, so we prefer to redeploy capital in a new trade for larger decay.
When looking at tomorrow’s VIX prices given a certain VIX price today, we see two very important trends of tomorrow’s VIX price as today’s VIX price increases.
In other words, when we start with a low VIX price today, tomorrow's VIX prices follow a much different trend than if today’s VIX price was higher.
Earnings plays, or trades placed one day prior to earnings, capitalize on a significant volatility contraction immediately following the release of an earnings report. However, is earnings IV expansion significant enough to make short premium trades one day after earnings profitable? Today Tom and Tony compare the risk and profitability of these two different earnings play strategies.
Some traders argue that Stop Loss for risk-defined strategies is necessary because it could prevent losing 100% of the trading capital.
So, today we are going to compare the performances with and without managing losers in spreads.
Non normally distributed data sets can be kinda strange. In this segment, we walk you through the intricacies of skewed data sets, like volatility, and tell you how to frame expectations of risk around these types assets compared to normally distributed data sets like stock returns.
Extrinsic value is a product of selling out of the money options. But as a general guideline, how much should we be carrying in a portfolio?
First we must consider allocation levels which will change based on volatility levels. Higher volatility more capital at work, means more extrinsic value we should be carrying on our books.
What we discover in this segment is a new rule to for the right balance of extrinsic to capital available.
Join Tom and Tony in today’s segment as they dig deeper into this topic.
Earnings plays capitalize on a significant volatility contraction immediately following the release of an earnings report.
However, how volatile are the P/Ls of these trades? Can holding these contracts for a longer period of time reduce over P/L volatility?
Today Tom and Tony compare the risks for different management strategies for some tech earnings plays.
Beta weighting is a relatively new concept in finance that allows complex portfolios (like those constructed at tastytrade) to be able to quantify their risk in a simple, normalized value.
The risk of an entire portfolio can actually be statistically computed from the perspective of one common index (usually SPY) and that makes it easier for traders to know how much directional risk they are exposed to at any given point in time.
Tune in as Tom and Tony explain how to interpret and use this information in an options portfolio.
With proper management, short puts can outperform a buy-and-hold strategy with higher P/L and lower portfolio volatility.
But what about their cost of trading?
Today, Tom and Tony discuss the expense ratio for options trading
The concept of risk tolerance is a fairly personal philosophy on how to approach trading. The idea always is to find the sweet spot where tolerances matches return expectations.
Join Tom and Tony today as they review this very important topic.
Our studies have shown that supplementing IVR with Outlier Rank (OR) increases average P/L and decreases P/L volatility for SPY strangles; however, is this increase in P/L the result of OR limiting tail risk?
Today Tom and Tony discuss whether using Outlier Rank changes the probability of large profits or losses when trading SPY strangles.
In most individual stocks, the major risk factor compared to ETFs is the propensity for outlier moves to be very large.
However, for TSLA, that does not seem to be the case when comparing to an ETF (QQQ).
So then why does the reward for TSLA short options seem to be so large relative to the risk taken?
The answer lies in another risk metric: IV expansion risk.
When IV expands it poses a threat to short premium traders, and since the chance of IV expansion in TSLA is rather high, that is one reason why options are so expensive now.
Weekly strangles sound appealing, because theoretically the premium decays relatively faster in the last days of the expiration cycle.
So should we alter our trading to sell weeklies? Today, Tom and Tony discuss the performance of trading weekly strangles
Bluffing is a term used in games like poker, through phony tells and betting styles.
But can we do the same in trading? In short the answer is no because of liquidity. Join Tom and Tony today as they explain why.
By selling strangles in SPY without adjusting for capital allocation based on IV, we tend to return roughly the same as the market. However, when we take into account scaling our account up when implied volatility is high, we tend to get much better results and a well-rounded risk profile that beats the overall market.
We have recently been testing whether “Outlier Rank” (OR) is an effective way to estimate exposure to outlier risk at a given IV level.
Our research has shown that trading 16Δ SPY strangles with low OR and high IVR increases average P/L and decreases P/L volatility; however, what about strangles with different deltas?
Today we show whether supplementing high IVR with low OR can improve profitability and reduce volatility for SPY strangles of different deltas.
When selling strangles, traders have several choices when deciding their short strikes. One popular choice is the 16 Delta put and call because this represents a one standard deviation move. What happens if we sell strangles at the two standard deviation mark?
Today, Tom and Tony discuss the pros and cons of selling two standard deviation strangles.
Statistics and options trading go hand in hand. We use stats in many ways to help develop a mathematical approach to the market.
Today we will cover some of the important elements in our trade approach rooted in statistics, and how we use them to help stack the deck in our favor.
We have recently been testing whether “Outlier Rank” (OR) is an effective way to estimate exposure to outlier risk at a given IV level.
Our recent studies on trading SPY strangles have shown that average PNL is maximized when trading in high IVR & low OR environments; however, how does OR affect trade volatility?
Today we will analyze PNL volatility for this max average PNL method of trading.
Strangles are one of the most used options trade. The risk profile is the the combination of a bullish position and a bearish one, this creates what's known as a delta neutral position. If we are going to trade these we need to know their historical performance. Join Tom and Tony today as they work through the important things to keep an eye on.
Vega is a greek that can be used as a proxy for theoretical risk and reward. But how efficient is it when comparing it to actual risk incurred on historical trades? The answer is very efficient. We find that when comparing theoretical risk (vega) to actual risk incurred in the trade (volatility of P/L), we find that the ratios of the two are identical no matter what delta strangle you sell. This means that as you increase theoretical risk and reward, your actual risk incurred increases proportionally.
IVR does not take into account how much exposure there is to outlier risk at a given IV level, so last week we introduced a concept called OR (Outlier Rank).
Outlier Rank is a way to estimate how often IV has understated an asset's returns in the past month relative to its long term average.
Last week, we found that trading in high IVR/low OR environments may give strangle traders a profit edge.
Today we investigate if trading in high IVR/high OR environments (assuming “returns volatility reversion") is also more profitable than conventional trading strategies.
Implied volatility is an important metric in options trading. Representing the level of uncertainty of future movement in an underlying. As the expiration moves out in time so to does the level of volatility.
When these levels are plotted on a graph, it is call the term structure of volatility. Join Tom and Tony in today’s show as they try to simplify this concept.
Is there any edge in selling puts on big down days? In this piece, we’ll look at the average performance of selling varying delta puts after the market sells off by 0.5%, 1%, and 1.5%
The Research Team conducts a similar study as last week except this time with respect to down days.
We look at the historical number of consecutive down days we observed in the market, average VIX levels, and average performance of selling puts.
We conclude that there is no price reversion that exists with down days, but the heightened levels of IV make the puts more profitable when selling into down moves.
IVR is a great metric for estimating the relative inflation of option prices at a given time; however, it does not take outlier risk into account.
Today Tom and Tony discuss an example of how to estimate the relative amount of outlier risk at a certain time, outlier rank.
We investigate how this can be incorporated into a trading strategy, and how the modified trading strategy performs against trading SPY strangles.
If you have been following the markets this year, you may have noticed on days when the market had large percentage moves, the market would temporarily stop trading.
We call the scenario “halting the market” or we might say that the circuit breakers were triggered.
Join Tom and Tony today as they cover this mechanic within the exchange system.
The Research Team dives deep into a concept that is hotly contested...getting short after a number of up days have been observed. We find that selling a call on any randomly selected day yields the same results as selling calls after a number of consecutive up days.
Future Basis is the difference in pricing of contracts along the futures curve.
Observing the spot price which is referred to simply as the cash market, can be compared to future prices to determine the current premium or discount in the market.
Join Tom and Tony as they review this important topic to understand.
Individual stocks are subject to single company risk, and thus are more prone to more volatile returns compared to assets and portfolios that are diversified.
Today we show how strangles on single company stocks in the tech sector can have PNLs that are nearly 12x more volatile than strangles on ETFs that track the market.
The market (SPY), spanning many different sectors and companies, is inherently diversified and has limited sector- and company-specific risks.
Trading 5 delta options has 95%+ probability to win, much higher than 16 or larger delta positions.
Should we use it consistently? Where’s the risk?
Today, Tom and Tony discuss the risk of trading extremely high probability options.
The Research Team goes back to 1929 and analyzes every crash that is comparable in magnitude to the 2020 crash, and then measured their subsequent recoveries. The comparison is astounding...with the 2020 recovery being roughly 7 to 8 times faster than comparable recoveries in history
Theta is the daily premium that traders expect to receive if everything stays the same.
So how much theta should we have in our portfolio on a daily basis?
Today, Tom and Tony discuss the theta range in a portfolio by allocating 25% of the capital.
When comparing volatility of Smalls products and micro futures products, the Research Team finds that the Smalls Stocks 75 has roughly 30% more volatility than the micro S&P 500 futures. However, the Smalls Dollar and Smalls Precious Metals futures have roughly the same volatility as the micro Euro and the micro gold contracts respectively
Pairs trading is a classic statistical arbitrage strategy that allows an investor to offset the losses from a poorly performing asset using a correlated asset with better performance.
Tom and Tony show an example of how to trade options on the divergence of correlated index pairs using the “IV-Adjusted Notional Rank.”
They will also show how doing so can reduce portfolio volatility, compared to trading strangled on the individual underlyings respectively.
Today we take a look at the new Small Exchange Indices: Small Stocks 75, Precious Metals, and Dollar indices. Learn about the symbols, margins, intraday scalping zones, and hedge ratios.
The Research Team takes a deep dive into analyzing the effect of earnings season IV in the S&P 500 compared to non-earnings season IV in the S&P 500.
We find that although individual equities’ IVs increase in earnings season, the indexes and the ETFs remain largely unaffected by the IV spike.
We know that implied volatility builds into an earnings announcement and ‘crushes’ after the news. So can we buy premium then?
Today, Tom and Tony discuss the possibility of buying premium after earnings announcement.
Portfolio diversification spreads investments over many sectors and instruments, reducing the overall amount of industry- and stock-specific risk.
In addition to lowering overall portfolio volatility, diversifying a portfolio also makes it more likely to show positive returns compared to betting on the performance of a single stock.
Tom and Tony show an example of how diversifying a portfolio with elements from the S&P 500 makes the portfolio more likely to perform as well as the market.
The Research Team builds off of Friday’s Market Measures and discusses how adding options to even the most diversified all stock portfolio can reduce overall portfolio volatility by another 30%.
This is due to the inherent diversification present in options since their price depends on underlying movement, time, and volatility.
Since outright stocks do not have multiple components making up their price movements, their diversification potential is limited.
Diversifying a portfolio across sectors and asset classes can significantly reduce industry-/company-specific risks. Over the last six months, how much of an impact could diversification have made to a portfolio of high cap stocks with a high market correlation?
Today we show an example of how adding market-neutral and market-inverse assets to a portfolio of stocks with high market exposure can reduce overall portfolio market correlation and volatility.
Sector ETFs cover a wide spectrum of markets, affording traders diversification within in the equities world. Today Tom and Tony discuss the performances of selling strangles in several sector ETFs.
Our Research Team takes a look at how selling premium after a year of no market action can be dangerous if you do not adjust your IVR threshold higher. The reason?
After a year of market complacency, IVR can be affected by very small movements in IV, thus when IV jumps very small, IVR can overestimate the inflation in IV.
So what do we make our threshold for selling premium after a year where VIX does not breach 20?
As we discussed on Friday, large moves in Implied Volatility will skew IVR to underestimate the current level of IV inflation relative to historical averages.
Today we are going to cover this topic in more detail to determine how likely IV contraction is at some IVR, given whether there were IV outliers in the previous year.
We find that, although selling premium for IVR > 30 is a good rule of thumb on average, this threshold tends to vary in the context of outlier events.
After large spikes in implied volatility, we tend to see IVR understate how inflated implied volatility actually is. In this segment, we show at what level we may accept to sell premium at after large spikes in VIX. Usually, we sell premium when IVR is above 30, but after large spikes in VIX we may adjust that threshold down to 20 or even lower.
During this selloff, the market has undergone periods of rapid growth and decline at an unprecedented rate. How have short premium strategies performed in these market environments? Today Tom and Tony discuss how profitability has changed during these regimes of rapid market movements.
We can use Implied Volatility and the prices of options to forecast a range of expected movements. Since multiple factors can impact the expected movement range, which one is dominant, underlying price or IV? Tom and Tony discuss and dissect this concept.
Tom and Tony guide us through research-backed reasons as to why pairs trades with very high correlation (0.8 to 1.0) are actually less risky than pairs trades with lower correlations between (0.6 and 0.8).
The Research Team looks at historical market crashes and makes the case that the 2020 market crash followed by the massive rally can be considered a statistical outlier in terms of a sharp reversal after a crash of greater than 30%.
Premium sellers are subject to numerous sources of risk, including potential losses from changes in IV of the underlying.
This is especially of interest now, as IV is still elevated from this recent selloff and prone to large moves.
Today we discuss how to quantify this risk from volatility-sensitivity and how problematic it may be to premium sellers in high IV environments.
Theta and IV have a direct linear relationship, meaning that when one goes up by a certain percentage, the other also goes up by the same percentage. Additionally, the larger the delta of the strangle, the larger the theta of that strangle is. Watch Tom and Tony dive into this relationship with the help of some research driven graphics.
Once a trade is placed, how it is managed can make all the difference in a positive P/L compared to a negative one.
For short premium strategies, we will typically look to manage at 50% or exit out around 21 days until expiration.
But why is this and what are the advantages/ drawdowns of active management?
During this selloff, traders have seen huge movements in the market, but also huge movements in market IV (the VIX). Volatility bounces, or rapid expansions in market IV followed by a rapid contraction, happen in all market environments and long-term phases of the VIX (expansion, contraction, and lull). Today Tom and Tony discuss what constitutes a bounce, and how likely they are to happen depending on the market environment.
We have found that stock indices tend to not react much on earnings days.
So what about 45-day options strategies initiated in earnings season?
Today, Tom and Tony show you the performances of index options around earnings announcements.
Recently, we discussed how many large market moves we’ve had recently. Today, we’re going to discuss point ranges we’ve had during the last 10 years and compare it to the ranges we are seeing in 2020.
Due to starting off at record highs and coming into extreme volatility, 2020 has experienced the largest ranges in history.
Time until expiration and volatility of an option go hand in hand. In theory when time decrease it can be made up for in an increase in volatility, and visa versa.
In today's study, we take a deeper look into how this relationship plays out, and if it is indeed a balanced scale.
As a result of the highly volatile moves of this selloff, many premium sellers experienced significant losses; however, how often can traders expect this to happen?
Tom and Tony discuss some of the worst losses option traders can expect from short strangle positions, and how likely they are to occur.
We find that short premium positions tend to have infrequent, but substantial losses and are much more likely to have small, but high probability positive returns.
The term “risk” is one of the most vaguely defined concepts in finance. There are many ways to quantify it depending on many factors.
In this Market Measures, tastytrade shows how to control for three main risk factors associated with trading options.
The ability to incrementally adjust the risk of a trade makes options trading extremely versatile. The risk of a strangle for example can be defined and turned into an Iron Condor. Risk can then be adjusted in $1 increments.
When we define the risk what are things to keep in mind:
- The range of the POP profile given a delta changes
- How the width of a spread can be adjusted to fit risk preferences
- How changing delta ultimately affects risk
Join the guys in today’s segment where they consider the various ways to incrementally adjust risk.
tastytrade always throws around the term “standard deviation”. But what does it really mean?
The Research Team dives deep into this concept and provides context around this move in 2020 compared to other moves in history including 2008.
Options are used as a form of insurance, and their prices tend to increase in periods of high market uncertainty.
However other factors, such as the price of the underlying, also contribute significantly to option prices.
Today we discuss the correlation between option prices and the price of the underlying on days with large market movements, and how it might differ from our intuition.
A well thought out set of decisions is vital to staying mechanical and can greatly increase your probability of success.
Decision making in trading doesn’t have to be a gut decision. We can not only put rules we can use probabilities as well.
Tom and Tony walk through a few ways tastytrade aims to ease decisions when setting up positions and managing a portfolio.
The 2020 Selloff has been the most rapid selloff in the 21st century, which resulted in large losses for directionally-neutral premium sellers.
tastytrade discusses how strangles of various deltas have performed in different types of selloffs compared to the long term average, and the types of losses to expect in selloffs of different velocities.
One problem with extremely high delta is potential Buying Power Expansion. If something happens to the naked positions, the BP expansion can reduce the capital availability and potentially triggers a margin call. Today, Tom and Tony explain this by using historical data.
Volatility is arguably the single most important metric in trading.
To quantify risk, we will look to the volatility index, The VIX.
Currently, the VIX is exceptionally high trading over 40.
Today, we take a look at what this actually means things we should look for and things we might want to avoid.
VIX and the market are generally inversely correlated, meaning that, on average, VIX moves in opposite direction of the market. However, there is another key component that determines the direction of the VIX: the magnitude of the down move.
Generally, the VIX increases as there are more down days AND the magnitude of those down days increase. However, if there is a mild down day amidst the larger down days, VIX may actually decline on the mild down day because the magnitude of said down day was not as bad as recently experienced by the market.
What makes this most recent selloff “silent” is that half of the losses we experienced were outside of normal trading hours. While the subsequent rally after the March 23rd low was mainly from normal trading hours.
Compare this to 2008 where 90% of the losses came from normal trading hours.
tastytrade developed a set of rules regarding capital allocation in margin accounts. Today, we found a way to apply the same rules to IRAs with one key adjustment.
When utilizing undefined risk strategies in IRAs, simply buy the 5 delta option to accompany the short option position. This will make your average buying power required for that trade roughly the same as a margin account while keeping the risk/return profile of the overall position the same. The capital allocation rules we have for margin accounts will now apply to IRAs as well.
Country ETFs are important components for portfolio diversifications. Today we show you how these ETFs performed in the past 15 years. We also show you how their correlations change in bull and bear markets.
How do outliers affect short premium positions during and at the end of the trade?
Study: * SPY, 2005 to present * 45 DTE * Sold 30∆ Strangles (short 30∆ put and short 30∆ call) the day before an outlier move (+- 3, 4, and 5%) * Held to expiration in order to study the entire 45 day period * Observed the effects of the outlier move on the strangle P/L
Results We find that initially, our positions take a hit due to the outlier move, but at the end of the trade, our positions were profitable on average.
Market moves are generally seen as independent from one another. Although that is true for small moves (less than 1% in magnitude), larger moves tend to not be independent.
In other words, if a large move (greater than 2% in magnitude) is observed on any given day, there is a greater chance to see another large move tomorrow than the chance of seeing a large move on any given market day.
In fact, if we have a 5% move today, it is 37 times more likely to see another 5% move the next day than a 5% move on any given market day.
Does the unemployment report have any impact on the market?
tastytrade runs an extensive study that looks at the performance of all days relative to the performance of unemployment report days.
We find that there is no statistical evidence that unemployment report days carry any different returns or volatility than a randomly selected market day.
With IV so high across the board, what types of underlyings should investors be looking to trade?
We have to consider account size, risk tolerance, and desired daily P/L as our metrics that determine the types of underlyings to trade and the strategy to employ.
When looking at “types of underlyings” we have two generic classifications: individual stocks and ETFs. For strategies: we have defined and undefined risk trades.
Ultimately for lower risk, lower P/L and smaller accounts, investors may consider defining risk or trading ETFs as opposed to individual stocks. On the flip side for higher risk, higher P/L and larger accounts, undefined risk trades and individual stocks may fit better.
A question tastytrade has been answering a lot during the recent selloff is “what if we buy options instead?.”
In this segment, we take a look at why buying options is, on average, not a profitable long term strategy from both a historical performance lens and a conceptual lens (analyzing implied volatility versus realized volatility).
We find that the only time buying options is profitable is the period right before a selloff, but since timing markets is nearly impossible, the strategy is not feasible long term.
How accurate are markets at predicting recessions? tastytrade's Research Team crunched some numbers and examined some data to uncover the answer.
Study * S&P 500, 1970 to present * Recorded all recessions since 1970 * Recorded number of large selloffs greater than 1% in each quarter
Results We find that the number of large down days is actually greatest in the quarter before the first quarter of a recession. During the recession, there are typically more down days than the average quarter, but not as many as the quarter preceding the recession.
This passing month has been very challenging for traders. The increasing IV adds additional pressure to options traders - negative P/L, buying power expansions, you name it.
What would have happened if traders started trading options at the top of 2008 before the crash? Tom and Tony examine some research to uncover the answer.
This passing month has been very challenging for traders. But how bad is it right now from a historical perspective?
We explore this by comparing the current market situation and the financial crisis in 2008.
In today’s Market Measure, Tom and Tony look at how often and how severely realized volatility overstates implied volatility. In other words, how much does the expected market movement underestimate actual market movement in periods of market selloffs like we’re experiencing right now.
We find that in this selloff, we had the largest underestimation of market volatility in history where the actual volatility was five times higher than what was predicted by implied volatility.