The Options Strategy Perfect for Volatile Markets

Unpacking the success of Schaeffer's recent straddle trades

CFA, Senior Market Strategist
Mar 27, 2020 at 12:45 PM
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A long volatility/ straddle strategy might be a good idea for the current roller-coaster market environment we're experiencing. Having a set allocation of your portfolio with these types of trades can be very beneficial to your overall returns, especially in times of turbulence. However, this strategy doesn’t necessarily require overall market volatility; you can get the best of both worlds with potential upside in stocks/ETFs when markets are trending higher as well. At Schaeffer's, we’ve developed a strategy using a blend of technical, sentiment, and fundamental analysis that has proven to be profitable over time, and can withstand virtually all market environments. 

Going back to October, the Volatility Trader service has issued 18 recommendations, and these trades have generated an average of 87.7% return per trade over this period.  During that same period of time the S&P 500 Index (SPX) has seen a return of roughly -20%. By putting just a small percentage of your portfolio into these types of trades, the profit generated from the long-volatility strategy will do a very good job insulating your overall investments from significant downside. Using SIR's recommended allocations into these trades, Volatility Trader has shown a +132% portfolio return over the course of the past 6 months. Had an investor used a 10% allocation of funds into this strategy, they would’ve generated a 13.2% return to their bottom line, greatly reducing the drawdown we’ve seen in the broad market over this same period. 

Here are some highlights of big winning volatility trades during this period: 

  • Anheuser Busch (BUD) March 80-straddle; recommended on 12/6/19, net profit of +226%
  • Invesco (IVZ) April 18-straddle; recommended on 1/24/20, net profit of +237%
  • Halliburton (HAL) April 24-straddle; recommend on 1/10/20, net profit of +231%
  • Sage Therapeutics (SAGE) March 67.50-straddle; recommended 2/7/20, net profit of +206%
  • Zillow Group (Z) January 30-straddle; recommended on 10/4/19, net profit of +127%

At Schaeffer’s, we have an extensive database of historical option prices, along with historical volatilities on individual stocks. The options market will oftentimes underprice premium on selected names. As a trader, you can take advantage of situations where the market may be underestimating future volatility on specific stocks, given their historical tendencies and current option prices. Our strategy uses technical indicators to search for names that may be setting up to enter more volatile periods, and looks for catalysts (earnings, Fed announcements, investor meetings, etc.) that could set this volatility in motion. By using a blend of these indicators, we have found a means to get all factors pointing in your favor, and potentially leading to big profits on these market-neutral positions.

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