Standard Deviation is a measure of the amount of variation in a set of values. A low standard deviation indicates that the values tend to be close to the mean of the set, while a high standard deviation indicates that the values are spread out over a wider range. In trading, the volatility of an option is equal to a 1 standard deviation expected move.
A stock will close within…
-1 SD 68.2% of the time
-2 SD 95.4% of the time
-3 SD 99.7% of the time
If we sell a put 1 SD below the stock price, it has an 84% probability of finishing ITM.
The further OTM we sell a contract, the higher the pop, but the smaller the credit received.
A put selling strategy outperforms tradition investment strategies. e.g. it beats the buy & hold strategy in both P/L & ROC.
Selling puts is effective even without management & entering the trade regardless of implied volatility. It’s shown that managing winners and selling premium when IV percentile is above 50% can vastly improve ROC and probability of success.
While we generate a greater return selling the at-the-money put (3.14 times more) and also saw a greater variance in P/L (3.08 times greater). While both strikes proved profitable, going further OTM provides the best opportunity to manage a winner and most efficient use of buying power in small accounts is in selling the 1 SD put.
a.) 1 SD put | b.) 1 ATM put
# of winners
% of winners
You trade using high probability, but…
-not enough occurrences (trade often)
-not enough premium in sale (low iv)
-too close to atm sale (wrong strike selection)
Improper time frame selection
-selling weeklies with little to no premium
-too much time to expiration leads to a decrease in ROC as theta decay is much less longer durations
Buying vs selling premium
Probability of profit for the seller
Probability of profit for the buyer
-premium sellers can win 2/3 ways
-sellers benefit from IV contraction
-buyers benefit from IV expansion
-selling OTM & ATM options allows us to obtain >50%