This is a simple strategy. Buy a one-year index long call spread, with the long position 10% In The Money (ITM), and the short position At The Money (ATM). For example, if SPY were trading for $50 per share, open the long position at $45, and the short position at $50, with the end date for both positions 12 months in the future.
In the tables below I’ve shown this strategy using both the S&P500 option (SPY) and the NASDAQ option (QQQ). A couple of notes are in order:
- There’s an extra year shown for SPY, because QQQ options didn’t start until the following year.
- SPY now has quarterly options extending out 2 years, so for SPY this strategy could be done on a quarterly basis. As of this writing QQQ only has one-year options expiring in January, so for QQQ this strategy could only be done on an annual basis.
- The tables below are both done on an annual basis, rather than a quarterly basis. For QQQ this is the only option, for SPY the quarterly options weren’t available in the earlier years. In any event, keep in mind these tables represent very few data points.
Options are only traded at discrete values, so usually it isn’t possible to trade an option with a strike price precisely the same as the index price, or 10% below it. For both the long and short ends, I selected the next strike prices above the target price.
Here are the tables, showing the return each year.
The ‘Return’ in the tables is the percentage of the underlying asset that was made as a profit or loss. Let me give two examples from the SPY table.
For 2007, if SPY were trading for $50 per share and a long call spread was opened on 200 shares (200 * $50 = $10,000), the profit would have been (2.88% * $10,000) = $288.
For 2008, if SPY were trading for $50 per share and a long call spread was opened on 200 shares (200 * $50 = $10,000), the loss would have been (6.75% * $10,000) = -$675.
Note that in this strategy money isn’t made by how much the index goes up, it’s made off of the difference between the premium collected on the short end (ATM) and the premium paid on the long end (10% ITM). Thus, maximum profit is made when the market goes up at all, how much doesn’t matter. Maximum loss is when the market goes down by 10% or more.
This is an analysis of past performance, but past performance is not a guarantee of future performance.
Comments / Questions: joseph AT StockMarketMovement.com