Looking at the four main stock indexes in the United States so far in 2018, we can see that the Dow 30 (/YM) has somewhat under-performed relative to the Nasdaq 100 (/NQ), the S&P 500 (/ES), and Russell 2000 (/RTY).

Outliers often catch the attention of traders combing for potential opportunities, just as the Dow 30 did recently on a new episode of Market Measures.

The thing is, previous research conducted at tastytrade has illustrated that put sales deployed in indexes after 5% pullbacks have historically performed quite well.

The graphic below provides a snapshot of the summarized findings from that tastytrade study, which backtested the performance of at-the-money (ATM) put sales in the Dow 30 (DIA) using historical data from 2005 to present.

In the table of findings below, you can see two different pools of data - one that includes all trades from that time period, and the other that includes only trades in which the underlying had experienced a 5% sell-off during the month:

Stock Candidates for Short Puts

While we can see in the findings above that the overall success rates of the two different approaches were nearly identical, there's more to the data than first meets the eye.

When the backtest was limited only to instances in which the underlying had dropped by at least 5% in the month (the second column of data), we can see that average P/L numbers improved considerably as compared to "all instances."

For traders that actively seek opportunities after pullbacks, the information presented above may help to reinforce their perspective.

But this data also brings up another question - if the indexes have bounced back from their 5% decline, is their still opportunity available in components of the index (i..e. single stocks) that have dropped by 5% or more and remain depressed?

This question is examined during the second half of Market Measures, and we think the content is well worth a few moments of your time. Specifically, the hosts examine IBM and MMM, and run them through the same gauntlet as the Dow 30 (DIA).

Historical data from IBM and MMM is backtested in order to evaluate the relative performance of put sales in those two underlyings. Once again the findings are broken into two categories - all instances, and only instances in which the underlying had dropped by 5% or more.

While the overall results were on average very similar to what was observed in the Dow 30, it must be noted that as single stocks, IBM and MMM do represent a slightly different risk profile than an index such as the Dow 30. Theoretically, IBM and MMM can go bankrupt or get bought out, whereas stock indexes cannot.

For a full breakdown of the results that came from backtesting historical put sales in IBM and MMM, we hope you'll take the time to review the complete episode of Market Measures when your schedule allows.

If you find this approach compelling, we also recommend you review previous research focused on put sales in "blue chip" stocks, which dovetails extremely well with today's blog post.

As always, we encourage you to reach out with any comments or questions, as we greatly appreciate your feedback and input. Just leave us a message in the space below, or write to us at support@tastytrade.com at your convenience.

Thanks for reading!


Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.


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