For an explanation of our methods and terminology, visit this previous post. All performance returns are from the perspective of buying (long) the options.
It was a mixed market for volatility traders in the options market for the weekly expiration 02-Dec-2016. The safest strategy turned out to be ATM straddle, which saw limited returns (depending on the amount of hedging) but also had limited losses. 25-Delta Calls and 25-Delta Puts were hit and miss propositions - hedged calls did well, while unhedged puts were the best bet on that side.
The mixed performance makes sense for a market that was somewhat schizophrenic during the week. On Wednesday and Thursday, weakness in the tech space weighed on the Nasdaq even while the Dow set a new record closing high. On Friday, these trends moderated a bit, with the Nasdaq making up some of the week's earlier losses, while the Dow ticked away from its peak.
Market drivers during the week were higher oil prices, fueled (no pun intended) by OPEC's deal to cut production, as well as the near-certainty that the Fed will raise rates later this month. The market response indicates that traders feel the effects of these factors will be felt differently in different parts of the market, leading to reactions that were more localized.
Losers for unhedged ATM Straddles outnumbered winners. Meanwhile, both unhedged 25-Delta Calls and unhedged 25-Delta Puts had significantly more losers than winners, especially for the calls.
For unhedged options, 41.4% of ATM Straddles were winners, with a return of just +0.9%. Unhedged 25-Delta Calls only came out a winner 11.3% of the time last week. The overall return for this strategy was -47.8%. This was the worst performance among the strategies we are comparing here.
Unhedged 25-Delta Puts won 27.5% of the time, but those winners had an average pay off of +351.3%. The strong gains by the limited winners helped give 25-Delta Puts an overall average return of +26.9%.
Goldman Sachs (GS) got a boost from an upgrade during the week, driving the stock to a new high. On Wednesday, Deutsche Bank upgraded its rating on shares of Goldman to "Buy," sparking a rally above a 2-week trading range and to a new high for the year. Unhedged ATM Straddles on GS returned +193.8%, while unhedged 25-Delta Calls returned +878%. Unhedged 25-Delta Puts lost all of their value.
Technology stocks dropped sharply on Wednesday and Thursday, as the sector reacted badly to higher oil prices and the prospect of higher interest rates. This volatility led to +154.3% return for unhedged ATM Straddles for the XLK, a technology ETF. It also led to returns of +1,013.3% for unhedged 25-Delta Puts. The 25-Delta Calls lost their full value.
Within the tech sector, Oracle (ORCL), Texas Instruments (TXN) and Intel (INTC) were among the big-name individual stocks where this move was felt most. Unhedged straddles for each of these stocks returned at least +155%, while unhedged 25-Delta Puts returned at least +557% each.
Re-hedging option deltas for the week was a good strategy across the board, though it cut into profits on the put side.
Unhedged ATM Straddles paid off an average return of +0.9% for the week, compared to +4.9% for positions that were hedged daily. For 25-Delta Puts, daily hedging cut the average return substantially. Unhedged, they paid off an average return of +26.9% compared to an average return of +5.2% for daily hedging.
For calls, though, hedging was a saving grace for the week. Unhedged 25-Delta Calls lost money at an average rate of -47.8%. Meanwhile, daily hedged 25-Delta Calls made money on average, scoring a +15.3% return.
In general, among the strategies we measure here, the best bet for last week was to be hedging calls or buying unhedged puts.