Would you trade a directional strategy that has this history?
Well, I just might. Watch this video to see why…
What’s the edge?
Far OTM and Long-dated options reduce overnight exposure to gaps.
Longer-dated options also limit the exposure to volatility spikes due to transitioning from contango to backwardation… because we are in the expiration dates that start higher and don’t increase as much.
Longer-dated and further OTM options have a smoother and more consistent premium decay.
Directional defense prevents many scenarios of experiencing multiple losses.
- End of day signals
- New 5-day Donchian channel touch that day
- No outside day (if both sides touched, then hold the previous signal)
- Sell .10 Delta Option >= 90 DTE
- Close at 90% profit target or opposite signal
Sell puts when the market is rising, sell calls when the market is falling. This is a bad directional trade but a great defense to allow Theta to work without riding huge trends against your position.
Why did I do this study?
I wanted to break this idea (sell far OTM and long DTE options on signals) by using what is about the worst market for short-term momentum. I even left the short signals on because they are abysmally “bad” because, not only is the signal bad, but the premium for the calls is so small.
This is not tradable. Sorry. There are no commissions here and it’s not diversified and doesn’t account for tail risk.
BUT, when traded on higher priced options and implementing true diversification — this study shows us that the combination of “far out” options and momentum signals is “hard to break”.
In that sense — this study successful proves an options trading principle.
This informs us which options to sell do not depend on the quality of the directional entry/exit. It’s the defense that is more important — it helps us avoid oversized drawdowns from very large movements that drastically impact that premium sold.