Using SPY as the initial test subject and about 10 years of daily open and close prices I set up a spreadsheet to compare various trade periods and strike ranges against the actual price movements. I also ran the numbers for 20 years and trades using every single trading day and the percentages were very close so I have chosen to work with a smaller chunk.
In this first study I used trade periods of between 5 and 40 trading days (not calendar days) and calculated the price move of SPY for each period ending on the option expiry, the third Friday of the month. The October 2013 monthly option expiry was the 18th, so trade start dates would have been August 22, 29th, September 6th, 13th, 20th, 27th, October 4th and 11th.
The percentage price move between the start and end of each period was calculated and compared to various strike distances represented as a percentage lower than the opening start price. I know the resultant "strikes" are not accurate to the dollar so this is more a relative measure to prove a point. If the price move did not end lower than the selected percentage or strike on expiry day, it was considered a successful trade.
Here is the resultant table. The colours represent the success rates up to 80% in red, between 80% and 85% in orange, 85% to 90% in yellow and anything over 90% in green. I figured that anything over 97% or 98% is just the narrow edge of the bell curve and not worth figuring out.
| 40 Days | 35 Days | 30 Days | 25 Days | 20 Days | 15 Days | 10 Days | 5 Days | Combined | |
| Strike | Win Rate | Win Rate | Win Rate | Win Rate | Win Rate | Win Rate | Win Rate | Win Rate | Win Rate |
| 0% | 65.52% | 61.21% | 60.68% | 59.83% | 60.68% | 63.25% | 58.97% | 56.78% | 60.86% |
| -1% | 69.83% | 68.10% | 66.67% | 67.52% | 68.38% | 68.38% | 66.67% | 74.58% | 68.77% |
| -2% | 73.28% | 71.55% | 73.50% | 72.65% | 73.50% | 76.92% | 74.36% | 83.05% | 74.87% |
| -3% | 78.45% | 77.59% | 78.63% | 77.78% | 80.34% | 82.05% | 82.05% | 89.83% | 80.86% |
| -4% | 82.76% | 82.76% | 82.05% | 81.20% | 83.76% | 90.60% | 91.45% | 93.22% | 85.99% |
| -5% | 87.93% | 87.07% | 85.47% | 85.47% | 88.03% | 93.16% | 92.31% | 95.76% | 89.41% |
| -6% | 88.79% | 87.93% | 89.74% | 89.74% | 91.45% | 93.16% | 94.87% | 97.46% | 91.66% |
| -7% | 91.38% | 90.52% | 93.16% | 94.87% | 96.58% | 94.02% | 96.58% | 99.15% | 94.55% |
| -8% | 93.97% | 93.10% | 94.02% | 94.87% | 96.58% | 94.87% | 98.29% | 99.15% | 95.61% |
| -9% | 95.69% | 93.97% | 95.73% | 94.87% | 96.58% | 94.87% | 98.29% | 99.15% | 96.15% |
| -10% | 95.69% | 95.69% | 96.58% | 96.58% | 98.29% | 95.73% | 98.29% | 99.15% | 97.01% |
| -11% | 95.69% | 96.55% | 97.44% | 96.58% | 98.29% | 96.58% | 98.29% | 99.15% | 97.33% |
| -12% | 97.41% | 97.41% | 97.44% | 96.58% | 98.29% | 97.44% | 98.29% | 100.00% | 97.86% |
| -13% | 98.28% | 97.41% | 97.44% | 97.44% | 98.29% | 98.29% | 98.29% | 100.00% | 98.18% |
| -14% | 98.28% | 97.41% | 97.44% | 98.29% | 98.29% | 98.29% | 99.15% | 100.00% | 98.40% |
| -15% | 98.28% | 98.28% | 97.44% | 99.15% | 98.29% | 98.29% | 99.15% | 100.00% | 98.61% |
It is worth noting that all periods hit the 90% range at -7% below the starting price and -4% for anything 15 days or less.
Assuming that there are trades at those 90% plus ranges, I like the odds.
Jeff.
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