The Bullish Strangle Nobody Talks About Almost Doubles Your Return. 20 Years of SPY Data.

Key Concepts

• Bullish Strangle: An options strategy involving the sale of an out-of-the-money (OTM) put and an OTM call, with a bias toward the put side (higher delta) to capture upward market drift.
• Delta: A measure of an option's sensitivity to changes in the price of the underlying asset.
• Return on Capital (ROC): A metric used to evaluate the efficiency of an investment; in this context, it measures the profitability of the options strategy relative to the capital required.
• Implied Volatility (IV): The market's forecast of a likely movement in a security's price.
• Delta Management: The active process of adjusting strike prices or rolling positions as the underlying asset moves to mitigate risk or capture premium.
• Naked Put: Selling a put option without a corresponding short position in the underlying asset.

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1. Main Topics and Key Points

The discussion centers on optimizing options strategies in a consistently bullish market (specifically the S&P 500). The speakers argue that in a market characterized by an "up and to the right" drift, neutral strategies often underperform or require excessive management.

• Strategy Comparison: The study compared 45-day SPY strangles over two decades, contrasting neutral (16 delta/16 delta) strangles with bullish-leaning (30 delta put/16 delta call) strangles.
• Performance Findings: Bullish strangles (30 delta put/16 delta call) yielded significantly higher annualized ROC compared to neutral strangles, while maintaining similar success rates.
• Risk/Reward: While bullish strangles are more volatile than neutral ones, they offer a superior risk-adjusted return compared to naked puts, as the short call provides a hedge and additional premium income.

2. Real-World Applications and Case Studies

• S&P 500/Micro E-minis: The speakers highlight that indices with passive upward drift are ideal for bullish-leaning strategies.
• Personal Case Study: One speaker detailed a year-long strategy in Micro E-minis, starting with a 6600/7100 strangle and actively rolling it into a 7600 straddle. By managing deltas and shifting the entire position upward as the market rose, the trader captured 534 points of premium ($53,000) while avoiding the "heat" of being short the upside.

3. Methodologies and Frameworks

• The "Shift Up" Methodology: Instead of holding a static position, the trader suggests shifting the entire strangle upward when the call side is tested. This effectively turns a short call into a short put, maintaining a bullish bias without taking on naked upside risk.
• Active Management: The process involves:
  1. Selling a strangle with a bullish lean (30 delta put).
  2. Monitoring the call side for testing.
  3. Rolling the entire position higher to follow the market trend.
  4. Closing positions at 21 days to expiration to manage gamma risk.

4. Key Arguments

• Avoid Naked Calls: The speakers express a strong preference against selling naked calls in strong markets, arguing that the premium received is often insufficient to justify the risk of an upward "grind."
• Premium vs. Risk: Selling a 30 delta put provides more premium than a 16 delta strangle. If a trader is worried about the upside, they should move the put strike higher rather than selling a call, or use the call only as a secondary source of premium that is actively managed.
• Market Drift: Because the S&P 500 has a historical upward bias, betting against the market (bearish strangles) consistently underperforms and is only recommended for specific hedging purposes.

5. Notable Quotes

• "I will not take upside risk. So even though I had a strangle on... I would shift the whole thing up. So my short call being tested turned into my short put being tested." — Speaker regarding active delta management.
• "You're playing into that up into the right drift that happens passively over time, you're still collecting more premium by keeping the call on."

6. Data and Research Findings

• Annualized ROC: The bullish strangle (30 delta put/16 delta call) produced nearly twice the annualized ROC of a neutral (16/16) strangle.
• Bearish Strangle Performance: Bearish strangles (16 delta put/30 delta call) showed the lowest volatility but significantly underperformed in terms of returns, confirming that they are ill-suited for the current market environment.

7. Synthesis and Conclusion

The primary takeaway is that in a strong, trending market, bullish-leaning strangles are more efficient than neutral ones. The most effective approach involves active delta management—specifically, shifting the entire strangle upward as the market rises. This allows the trader to collect premium from both sides while avoiding the catastrophic risk of being short the upside in a bull market. Success depends on trading small enough to withstand variance and having the discipline to adjust strikes rather than holding static, "set-and-forget" positions.