Selling puts is one of the most common implementations of an option strategy during a bull market, but we have to look at it in the context of earnings volatility. This is a risky strategy, but there is a clever way to reduce risk.
There’s actually a lot less ‘luck’ involved in successful option trading than many people realize. We’ll get specific with short puts on TSLA. Let’s look at a three-year back-test of a short put strategy with these quick guidelines:
* We’ll test monthly options (roll the trade every 30-days).
* We will avoid earnings.
* We will examine an out of the money put — in this case, 30 delta.
* We will test this short put looking back at three-years of history.
What we want to impress upon you is how easy this is with the right tools. Just tap the appropriate settings.
If we did this 30 delta short put in Tesla Inc (TSLA) over the last three-years but always skipped earnings we get these findings:
First we note that the short put strategy actually produced a higher return than the stock, with 106.4% versus 25.1% or a 81.3% out-performance. Yes, a position that benefits from Tesla stock “not going down very much,” did better than owning the stock.
Even better, the strategy has outperformed the short put that was held during earnings — which means it takes even less risk to get the massive return. Let’s turn to that piece, now.
GOING FURTHER WITH TESLA
Just doing our first step, which was to evaluate the short put while avoiding earnings is clever — certainly an analysis that gets us ahead of most casual option traders. But let’s take the analysis even further.
This time, we will do the exact same back-test, but we will only look at earnings. Specifically, we will short the put two-days before earnings, let earnings happen, then close the option position two-days after earnings.
Here are those results for the same 30 delta short put:
While Selling an uncovered put in Tesla during earnings did prove to be a winner, more importantly, it returned less than the same short put that avoided earnings.
What Just Happened
This could have been any company — like Apple, Facebook or Amazon, or any ETF. What we’re really seeing is the radical difference in applying an option strategy with analysis ahead of time, in this case understanding the impact of earnings. This is how people profit from the option market — it’s preparation, not luck.
To see how to do this for any stock, for any strategy, with just the click of a few buttons, we welcome you to watch this 4-minute demonstration video:
Thanks for reading, friends.
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