Talking Points
Here is a chronological list of topics, claims, and statements from the transcript:
1. Risk management may be more effectively achieved by considering *when* to trade rather than *what* to trade. The analysis tests what happens when options positions are spread across multiple expirations instead of all expiring at the same time.
2. Laddring option positions involves spreading them across multiple durations. This approach is considered a volatility-dampening trade as trading further out on the curve provides less volatility exposure compared to shorter duration trades.
3. Intel was mentioned as a stock where this strategy could be applied, specifically by looking at further out expirations after selling 37 strike February puts.
4. Traders frequently use various option strategies and deltas to diversify portfolios, with the standard optimal time often cited as 45-day expiration.
5. Diversification can be further improved by spreading expiration dates across multiple cycles, a strategy known as laddring positions.
6. When laddring puts, one method is to move the strike price down by one strike for every month further out in time. For example, if a stock is 100, one month out might be the 95 put, two months out the 90 put, and three-four months out the 85 put.
7. While not explicitly focusing on a specific delta, this method of moving down one strike per month typically results in a similar delta range (e.g., 29-32 delta) across the different expirations.
8. The study's methodology for laddring positions involves standardizing by delta, specifically using a 30-delta option, to ensure comparability across different expirations.
9. In the context of the study, laddring positions means allocating risk across three expirations (e.g., one put in 30-day, one in 60-day, and one in 90-day) instead of placing all the risk in a single 30- or 45-day expiration.
10. The study analyzed 30 delta SPY puts over a 12-year period using this laddring methodology.
11. While the traditional method of selling puts (single expiration) yields better average profit and is more efficient due to quicker trade cycles, laddring positions offer a higher success rate and lower risk.
12. The reduced risk and higher success rate of laddring come from spreading volatility exposure, as front-month volatility is typically higher than further-out volatility, which also results in less potential reward.
13. The phenomenal success rate observed in both traditional and laddered strategies over the last 10 years is significantly attributed to the market being mostly upward trending during that period. The underlying mechanics of the directional bias are considered sound.
14. The study evaluated the effectiveness of laddered positions in managing portfolio risk by calculating the daily P&L volatility as a percentage of the maximum potential profit.
15. Diversifying positions across multiple expirations significantly reduces portfolio volatility. Further out expirations inherently have less volatility exposure, more time, and less intrinsic value if there are large market moves, which slows down profit and loss fluctuations.
16. The P&L volatility distribution for the core (single expiration) strategy is wider compared to laddring, which shows much lesser volatility. Selling 90-day options results in slower profits but also slower and lesser near-term losses.
17. A similar pattern of reduced volatility was found when laddering one standard deviation strangles. Strangles generally display lower volatility compared to naked puts, even though puts performed exceptionally well during the previous bull market.
18. Selling the call side in a strangle hinders profit potential but significantly reduces tail risk. However, the P&L volatility change from selling both sides of a strangle has not been very significant over the last 10 years due to the market's predominantly upward trend.
19. A key takeaway is that spreading positions across multiple expiration cycles can reduce risk and increase the success rate, but it may sacrifice some potential profits.
20. Another takeaway is that neutral strategies like strangles exhibit lower volatility compared to naked puts in both traditional and laddered portfolios, attributed to selling both sides and reducing overall delta exposure.
21. For a long-term bullish outlook on a stock with relatively high implied volatility, a recommended strategy is selling puts, which typically has a 60-75% probability of success, especially when spread across multiple time frames.
22. This strategy uses lower buying power, particularly in a margin account, and allows for accumulating delta exposure (e.g., 100 deltas from multiple 30-delta options) without buying 100 shares of stock, potentially using similar or slightly more buying power.
23. This approach is considered an intelligent way to trade stocks with a long-term outlook, effectively utilizing market mechanics and managing risk.