It was generally a good week for volatility sellers in the options market for the weekly expiration of 30-Dec-2016. This was especially true for calls; winners were far more prevalent for puts and at-the-money bets, but losers outpaced winners across the board.
As could be expected during a holiday period, the market lacked major catalysts during the week. Profit taking led the major averages to close out 2016 with a three-day losing streak, drifting off their recent highs.
For the week, the Dow dropped -0.9%. Meanwhile, the Nasdaq slipped -1.5% and the S&P 500 tumbled -1.1%.
This was the whimper that ended a bang of a year though. The year as a whole saw the Dow jump +13.4%, the Nasdaq climb +7.5% and the S&P 500 advance +9.5%.
For the final week of the year, unhedged ATM bets returned winners 41.9% of the time, leading to an average loss of 6.6%. The call side is where the real blood-bath occurred. Only 4.6% of unhedged 25-Delta Call positions came back winners and the average loss was 79.6%.
Winners were more prevalent for 25-Delta Put bets. Unhedged positions here were winners 33.9% of the time during the week - still generally a loser 2 out of every 3 times - but the average return was positive at +23.9%.
VanEck Vectors Junior Gold Miners ETF (GDXJ) -- Gold mining stocks were big winners on the week. Gold prices suffered a decline in the wake of Donald Trump's election as president, but bounced back during the final week of the year. This rise boosted gold miners, especially during a rally on Thursday.
As such, the GDXJ, a gold-mining ETF, was one of the standout performers on the call side during the week. Unhedged 25-Delta Calls for GDXJ had an average return of +700%. Unhedged ATM Straddles returned an average of +126.1%.
iShares Nasdaq Biotechnology (IBB) -- Sticking to the ETF theme, biotech stocks did particularly poorly during the week. This was evidenced by a steady decline in the IBB, a biotech sector ETF, which started the holiday-shortened week with an initial advance but then lost ground steadily through the rest of the week. 25-Delta Puts for IBB had an average return of +589.8%, while ATM Straddles returned +108.7%.
It was a mixed bag for hedging during the week. Generally, it was best not to hedge, except on the call side.
Once-hedged positions were the saving grace for the 25-Delta Call bets, turning a significant loser during the week into a winner. However, the effect was the opposite on the put side, turning a winning position, on average, into a losing one.
Once-hedged 25-Delta Calls had an average return of +18.4%, compared to a loss of -79.6% when unhedged. Daily hedges weren't as helpful, but did work to cut the losses, with an average loss of -17.2%.
Once-hedged 25-Delta Put positions had a negative return of -64.3%, compared to a positive +23.9% when unhedged. This just got worse when hedged daily. The average loss for a daily hedged 25-Delta Put was -94.2%.
For ATM Straddles, once hedging had little impact, turning an average loss of -6.6% when unhedged into an average loss of -6.1% with single hedging. On average, daily hedging was a mistake, however. The average loss expanded to -24.8% with this strategy.