In our quest to understand trading options for income, the topic of this article is to compare Weekly vs. Monthly income from short Strangles.
A strangle is an option strategy in which you sell OTM (out of the money) Call and Put options. It is an undefined risk since we have only Short option positions with no corresponding Long option positions to limit the loss (such as an Iron Condor option strategy).
Tasty Trade recently ran this test on the SPY (an ETF for the S&P 500) from 2011 through 2013. However, they chose to start the Weekly on the close of Monday, which leaves only four days till expiration. At Options Annex we trade the Weekly starting on Friday at the close, which provides a true seven days till expiration. Our experience has shown that the Weekly is superior to the Monthly in generating income while reducing risk.
As a response to Tasty Trade, we ran their test on the SPY for just 2011. That year provided both large variations in IV (implied volatility) and price movement (moving up and down, ending the year exactly where it started).
The test was conducted in a similar manner to Tasty Trade. The Monthly position was opened on the first business day of the month, and closed the last business day of the month (approximately 15 days prior to expiration). The Weekly was opened each Friday at the close, and then went to expiration.
What were the results (see the table above)? Well, they were far different from the results of the Tasty Trade test. In just one year, the Weekly generated a P&L of $1,316.50 (vs. $562 for the Monthly). In addition, we also provided the percent winners as a measure of POP (probability of profit). The Weekly had a percent winner of 96.23% after 53 trades (vs. 75% after 12 trades for the Monthly).
In conclusion, the Weekly outperforms the Monthly in both P&L and reduced risk. These results mirror the results we performed on the SPX over a 5-year test period.
If you would like to learn more about options, and how to generate consistent weekly income trading options, go to Options Annex.