Selling puts on breakouts (Sanz Prophet)

Here are a few histogram plots in response to a post on Sanz Prophet’s blog:

http://sanzprophet.blogspot.ca/2013/03/selling-puts-on-breakouts.html

The plots show SPY returns after buying VIX lows (similar to buying SPY breakouts) then selling on expiry (Opex).  Only one trade loses more than 6%, confirming Sanz’s comment regarding tail frequency.  Buying VIX highs are shown for comparison.

The tighter distribution makes perfect sense: VIX is a 1 month forward volatility forecast (evidently a very good one).  Therefore 1 month SPY returns are expected to cluster tightly after VIX lows.  Options prices include forecasted volatility, thereby ensuring efficiency (no free lunches – see next post).

Buy SPY on VIX 20 day low, sell at opex (average trade 16 days):

Picture2

Buy SPY on VIX 20 day high, sell at opex (average trade 16 days):

Picture1

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