SPY Short Straddle backed up with the Smile Strategy produces Positive Expectancy By Ken Hodor 4/25/12

Presentation Overview Basic premise and history 6-year back-tested results Analyze Drawdown and expectancy My past showed all sellers of options have negative expectancy Deal with “black swan” events Conclusion

Suggestion Selling Monthly At The Money (ATM) Straddles has a positive expectancy you make money

What about Various Strikes?

What about since Oct?

SPY Short Strangle 6 Strikes above the current price Sell monthlys one month out Results for past 6 years

Short Straddle

SPY Short Call Win = 90.3% Average Win = 0.99 Average Loss = 1.46 Expectancy = 0.52 Maximum Drawdown = 4.17 Cumulative Gain =54.38

SPY Short Put Win = 69.4% Average Win = 4.11 Average Loss = 6.91 Expectancy = 0.11 Maximum Drawdown = 55.25 (Huge!) Cumulative Gain = 53.56

SPY Short Strangle Win = 72.2% Average Win = 4.54 Average Loss = 6.40 Expectancy = 0.23 Maximum DrawDown = 39.92 Cumulative Gain = 107.95

So how to mitigate DrawDown? Stop Loss Day-Trade 5+ times more weekly calls and puts than Straddles “Smile Strategy” 30 Delta or higher

Day-Trade Weekly Puts and Calls

Short Strangle + Trading Weeklys

Conclusion SPY Short Strangle good for income Much better than Money Market Day Trade Weeklys to mitigate or even eliminate drawdown