Options Strategy Labs: 2007

As volatility has dropped in the past two years in the treasury market, option-selling strategies have become less successful. Nonetheless, one strategy — entering short strangles after the monthly employment report — has been profitable since 2001 (see "Jobs report short strangle," Options Trader, March 2007).

This trade — short out-of-the-money (OTM) puts and calls — gained 138 percent during this period. The recent lower-volatility environment led to a higher percentage of winning trades (89 percent), but the average trade ($58.21) was quite small because of the relatively low premiums. And as potential profits fell, the trade’s risk, defined as potential gain vs. loss, climbed.

This test attempts to capture similar gains with less risk by entering a short iron butterfly — short at-the-money (ATM) calls and puts plus long OTM calls and puts.