Option Trading Strategy Results: 03-Mar-17


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For an explanation of our methodology, visit: https://marketchameleon.com/Blog/post/2016/09/09/option-trading-strategy-analysis-our-methodology

In general, buyers of volatility had difficulty finding winners for the weekly expiration 03-Mar-17.  However, employing a daily hedging strategy during the week was a saving grace, allowing investors using this technique to post profits.

Unhedged ATM Straddle bets returned winners 31.4% of the time, leading to an average loss of -18.5%.  Winners were even harder to find for calls and puts.  Unhedged 25-Delta Calls were successful in 16% of bets, with an average loss of -42%.  Meanwhile, unhedged 25-Delta Puts had a similar winning percentage, posting profits in 15.7% of cases.  However, the average loss for puts was slightly better than for calls, at -34% for the week.

Hedging Comparison

A daily hedging strategy was a profitable one for the week.  It turned losses into profits across the board.  However, hedging overall was only a limited success, as once-hedged positions were little better than unhedged ones.

Daily hedged ATM Straddle positions had an average return of +1.4%, compared to an average loss of -18.5% for unhedged ones.  Once-hedged ATM bets were little changed from their unhedged counterparts, with an average loss for the position of -18.6%.

The most dramatic hedging swing came on the call side.  Daily hedging took a -42% average loss for unhedged bets to an average profit of +17.5% when the hedge was in place.  However, single hedges were actually fractionally worse on average, with an average loss for the week of 42.4%. 

For 25-Delta Puts, daily hedges led to an average return of +10.8%, compared to an average loss of -34% for unhedged positions and -29.9% for single-hedged ones.

Standouts

Bank of America (BAC)

Bank of America staged a seemingly unprompted rally on Wednesday and held most of its gains over the next couple days.  It eventually finished the week at $25.44, an advance of nearly 5% compared to the previous Friday's close.  The rally allowed BAC to reach a new multi-year high, building on a long-term upswing. 

A report on Motley Fool attributed the most recent uptick to the aftermath of President Donald Trump's speech to Congress on Tuesday night.  The argument goes that Trump's general pro-growth stance will be helpful to business in general and to banks in particular.  Separately, Seeking Alpha published a bullish note on BAC, suggesting that the stock could double from its present levels.

Unhedged 25-Delta Calls for BAC had an average gain for the week of +672.7%.  Unhedged ATM Straddle positions recorded an average profit of +66.7%.

Micron Technology (MU)

An analyst upgrade boosted shares of Micron Technology.  Goldman Sachs raised its rating on the stock from Neutral to Buy.  The news prompted a rally on Wednesday, which followed through with additional gains on both Thursday and Friday.  In total, the stock rose about 10% on the week to close out Friday at $25.56.

Unhedged 25-Delta Call positions for MU posted an average profit for the week of +814.7%.  Unhedged ATM Straddle bets had an average gain of +141.8%.

Target (TGT)

Shares of retailing giant Target dropped during the week following the release of a disappointing earnings report.  The company reported earnings that fell for the fourth quarter, as lower sales and weaker margins affected the holiday season.  Comparisons were also hurt by a one-time gain in the previous year's fourth quarter.  Target's adjusted earnings came in below expectations.  The firm also issued a weak forecast for the current quarter. 

The stock plunged Tuesday after the earnings report was released and could not stage a substantial rebound during the rest of the week.  The stock finished Friday at $57.35, a 13% drop compared to the previous week's close.

Unhedged 25-Delta Puts for TGT returned an average profit for the week of +1,233%.  Unhedged ATM Straddle positions had an average return of +224.4%.

Palo Alto Networks, Inc. (PANW)

Another victim of a disappointing earnings report was Palo Alto Networks.  The company reported a quarterly profit of $0.63 per share, compared to $0.43 per share last year and to a consensus analyst estimate of $0.69 per share.  The company also provided a forecast for the current quarter that was below what Wall Street was projecting.

The news sent shares reeling on Wednesday.  The stock held steady from there, closing out the week at $115.55.  This was down from $153.01 at the end of last week, a fall of more than 24%.

Unhedged 25-Delta Puts for PANW posted an average gain for the week of +1,177.8%.  Unhedged ATM Straddle bets had an average return of +242.3%.