The 2019 trading year looks to be ending on a high note, at least for the three major U.S. stock indexes (S&P 500, Nasdaq, Dow), which have all notched record highs in the days leading up to Christmas. 

However, that shouldn’t really come as much of a surprise, especially given that the two primary market narratives which have constituted the “wall of worry” in 2019 have largely been put to bed until next year. These would, of course, include ongoing positioning by the U.S. Federal Reserve as well as the now infamous U.S.-China trade war. 

During their final meeting of 2019 (earlier in December), the U.S. Federal Reserve essentially served up a steaming cup of green tea to global investors when they announced their intention to continue to “accommodate” for the foreseeable future.

The Fed essentially dimmed the lights and turned on some new age chillax music when announcing that if inflation were to materialize in the near future, they would likely wait for signs of “sustained” inflation before adopting a more hawkish (i.e. rate-raising) stance. Per that posturing, “accommodative” might be an understatement. 

With investors lulled into a trance-like meditative state by the Fed, the U.S. and China added a “yule log” to the holiday fire when they jointly announced that an agreement had been reached on a so-called “Phase 1” trade deal.

The fact that the Phase 1 deal did virtually nothing to address the thorniest outstanding issues between the U.S. and China isn’t currently of consequence, apparently. Instead, global financial markets appear to have adopted the belief that a simple de-escalation in tensions provides a solid basis for optimism heading into 2020. 

Looking at the VIX, which is currently trading at 12 and change, it appears market volatility has taken a cue from these narratives and rolled up next to the holiday fire for a nap.

If it’s starting to feel like a long time since the VIX has traded above its historical average of 18-19 for a sustained period, that’s no coincidence. The most volatile trading in 2019 occurred at the start of the year, when uncertainty at the end of 2018 spilled over into 2019. 

As one can see in the slides below, 2019 has largely been a non-event as it relates to volatility, according to several high-profile data points:

As one can see in the first graphic above, 2019 saw more volatility than 2017, but that’s not saying much given that 2017 was arguably the lowest volatility trading year in modern record. The VIX averaged its lowest ever annual reading in 2017. 

Considering that the trade war is now seemingly on better footing, and that the Federal Reserve stands ready to further accommodate the economy as necessary, it’s currently difficult to envision how volatility might expand substantially in 2020. 

But that’s the thing about the financial markets, anything can happen at any time, and historical performance can never be counted upon as a predictor of future behavior. It’s entirely possible a new narrative materializes in 2020 that assumes a place on the wall of worry next to U.S. central bank policy and the trade war.

However, based on current trends, it’s likely that many traders are already strategizing for another melt-up in the major indexes. And for that group, a new episode of Market Measures on the tastytrade financial network may be just the ticket.

On this installment of the show, new research is unveiled focusing on the historical performance of selling calls in markets that are trending higher. An approach such as this is basically akin to selling puts into market weakness—both of which are contrarian “mean reversion” plays which have historically exhibited attractive results. 

In this particular tastytrade market study, the research team conducted a backtest on a short call trading approach that was deployed after the market had risen across a varying number of consecutive days.

The intent of the study was to ascertain whether short calls performed optimally after a certain number of days in which the market had trended higher, covering one day, two days, three days, four days, five days, six days and seven days.

As such, a backtest was conducted on each of the above categories, as well as “all instances” for the purposes of comparison. The following parameters were included in the backtests:

  • Utilized data in SPY from 2005-present
  • Backtested 30 delta short calls
  • Trade duration on average 45 days-to-expiration (DTE)
  • All trades held through expiration (i.e. no management)
  • Compared:
    • All occurrences
    • All “up” days
    • Consecutive “up” days (1, 2, 3, 4, 5, 6, 7)

As one can see in the data below, the short call trading approach performed at its best when traders waited for at least six or seven consecutive “up” days in SPY:

Per the graphic above, one can see clearly that short calls in SPY have produced their highest average win rate and P/L when deployed after six or seven consecutive days higher.

While the above conditions are obviously more rare than instances in which the SPY goes up one day and down the next, the research conducted by tastytrade may help traders further optimize their approach to trading melt-ups in the future. 

And much like the above findings, previous research conducted by tastytrade similarly demonstrated that waiting for consecutive “down” days in the SPY before selling puts also tended to produce superior results. To review these findings in greater detail, traders are encouraged to review the following episodes when scheduling allows:

Additional information is also available in the tastytrade LEARN CENTER.

Sage Anderson is a pseudonym. The contributor has an extensive background in trading equity derivatives and managing volatility-based portfolios as a former prop trading firm employee. The contributor is not an employee of Luckbox, tastytrade or any affiliated companies. Readers can direct questions about topics covered in this blog post, or any other trading-related subject, to