For an explanation of our methodology, visit: https://marketchameleon.com/Blog/post/2016/09/09/option-trading-strategy-analysis-our-methodology
It was yet another bad week for buyers of volatility in the options market for the weekly expiration 17-Feb-17. This followed a string of similar performances over the previous several weeks. As has been the case lately, there were some areas of profitability on the call side, but puts were a losing strategy nearly across the board.
Unhedged ATM Straddle bets returned winners 26.3% of the time, leading to an average loss of -27.3%. Meanwhile, unhedged 25-Delta Calls came back winners in 18.6% of cases, but posted only a small loss on average, as profitable winners almost overcame the large number of losers. The average loss for this strategy was -3.5%.
25-Delta Put positions were not as bad a bet as they have been in recent weeks. But that's only because recent weeks have been a blood bath. For 17-Feb-17, the strategy returned winners 9.4% of the time for an average loss of -67%. (Just for comparison, the previous week saw 25-Delta Put positions return winners just 4.8% of the time and give an average loss of -84.2%.)
DineEquity Inc. (DIN)
Shares of DineEquity, owner of the Applebee's and IHOP chains of casual dining restaurants, dropped sharply on Friday following news that the company's CEO has stepped down. The leadership change came as the company revealed preliminary earnings figures, showing weak sales, including a 7% drop in comparable store sales at Applebee's for the fourth quarter.
On the news, the stock fell $6.41, or 9.6%, on Friday to finish at $60.14. The slide took the stock to a new 52-week low. Unhedged 25-Delta Put positions returned an average gain of +2,335% for the week. Unhedged ATM Straddle positions had an average gain of +92.9%.
Hornbeck Offshore Services, Inc. (HOS)
Offshore services firm Hornbeck released quarterly results on Thursday that included a loss for the quarter of $0.53 per share. Beyond that, though, the company issued a warning about its future liquidity position, saying that it "does not currently expect to have sufficient liquidity to repay" certain outstanding debts. The first of these debts mature in fiscal 2019. Shares plunged on Thursday and drifted further lower on Friday. They closed Friday at $4.65, down about 32% from where it closed the previous week.
Unhedged 25-Delta Put positions for HOS had an average return on the week of +976%. Unhedged ATM Straddle positions returned +175.9% on average.
The Procter & Gamble Co. (PG)
Consumer products giant Procter & Gamble saw its shares jump during the week after activist investor Nelson Peltz's Trian Fund Management hedge fund revealed that it had taken a stake in the company. A Reuters report put the size of Trian's holding at $3 billion. The news sent shares of P&G sharply higher on Wednesday and they held their gains through the rest of the week. The stock finished Friday at $91.04, up more than 3% on the week.
Unhedged 25-Delta Call positions for PG returned an average gain of +1,126.8% for the week. Unhedged ATM Straddle bets had a return of 200%.
Shutterfly Inc. (SFLY)
Shares of online photo company Shutterfly have made steady upward progress over the last couple weeks. The stock has finished higher in each of its last eight sessions. It was helped this week by the news that it will be added to the S&P SmallCap 600 index, where it will replace Vascular Solutions Inc. (VASC). The change will become effective at the open of trading on February 21. Becoming part of an index can give a boost to a stock, as index-related funds need to hold that stock.
Shutterfly finished Friday at $48.06, up from a close of $42.91 on February 7. Unhedged 25-Delta Call positions for SFLY posted an average return for the week of +1,442.5%. Unhedged ATM Straddle positions had an average return of +220.3%.
Hedging was a good strategy on the put side during the week, cutting losses by more than 40%. It exacerbated things on the call side though, leading to notably steeper average losses. There was little difference across the board between single hedging and daily hedging.
For 25-Delta Put positions, unhedged bets had an average loss of -67%. This was cut to -38.9% with single hedging and -38.1% for daily hedging. The narrow average loss of -3.5% for unhedged 25-Delta Call positions became an average loss of -38.9% for single hedged positions and -37.3% for daily hedged positions.
For ATM Straddle bets, hedging made little difference. The average loss for an unhedged position was -27.3%, compared to -27.3% for a single hedged position and -27.1% for daily hedging.