Option Trading Strategy Analysis: Our Methodology

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One of the analytical processes we like to run at Market Chameleon is a breakdown of the movement in weekly option values from the beginning of the week through expiration. It allows us to pick apart different option strategies that traders have and see which ones were the most beneficial for the week. To do this, we took an entire set of weekly option expirations and tracked the value of those options (and their underlying stocks) from the beginning of the week (usually 10:00 AM on Monday -- after the markets have opened and products have set a valid baseline) through the end of the week, when the options expire (usually 4:00 PM on Friday). We then compared the total net return for the product as a percentage of the initial option premium invested. Additionally, we compared three different hedging techniques to try and determine which technique returned the best results for the week.

Here are the types of hedging techniques we compared:

  • Unhedged: this means we'd theoretically buy (or sell) the option at the beginning of the week and hold it through expiration, returning the realized value of the option
  • Hedged Once: this means we'd buy the option and immediately hedge with stock so that our net delta position was neutral, but then hold both the stock and the option until the end of the week, where we'd evaluate the return
  • Hedged Daily: similar to "Hedged Once", but in this case, we also hedge with more stock at the end of each week day to neutralize our delta. This strategy results in much more buying and selling of stock shares throughout the week

And we applied these techniques to the following option instruments:

  • At-the-Money Straddle: this is one call contract and one put contract for the option strike that is closest to the underlying price. For example, if a stock is trading at $150, we'd buy one call on the $150 strike and one put on the $150 strike. Theoretically, a $150 call option when the stock is trading at $150 has no value, but the markets will still price in a significant premium because there is time remaining before expiration when that option could gain a great deal of value
  • 25-Delta Call: this is one call contract for the strike that represents the 25-Delta Call option, or whichever strike is closest to 25
  • 25-Delta Put: this is one put contract for the strike that represents the 25-Delta Put option, or whichever strike is closest to 25

By pairing the three hedging techniques with each of the three option instruments, that leaves us with nine different strategies to compare when we're analyzing the option results. You'll see these terms recur as we apply this analysis to the option market going forward.

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