As many of my readers know, my favorite option strategy is to sell out-of-the-money put credit spreads. The win rate is very high, because we can make money even if the stock remains stagnant or even falls a modest amount.
Furthermore, limiting the margin requirement by selling put spreads instead of naked puts substantially increases the trade's rate of return.
Two academic studies - one from and a more recent one from - - ack up my opinion regarding the superiority of the put-selling option strategy, concluding that while many option strategies lose money, put selling is one of the few option strategies that outperforms a buy-and-hold stock portfolio.
The study states on pages 17 and emphasis added:. In agreement with previously presented results and prior literature, many option portfolios have risk-adjusted performance worse than the benchmark portfolio. However, some option portfolios exhibit risk-adjusted performance which exceeds that of the benchmark stock-only portfolio.
Table 2 on page 27 of the study ranks option strategies in descending order of return and selling puts with fixed three-month or six-month expirations is the most profitable strategy. At fixed month or longer expirations, buying call options is the most profitable, which makes sense since long-term call options benefit from unlimited upside and slow time decay.
This study supports my strategy of selling puts with 2- to 5-month expirations and buying LEAP call options with one year or longer expirations.
Below is an excerpted reproduction of the study's table 2 for options that have fixed three-month expirations during both year and year holding periods:. I'm not surprised that selling puts is the most profitable options strategy , but I'm a bit surprised that selling in-the-money puts is the best strategy.
This is probably because the study does not include the horribly bearish stock market period. If the study were updated today, I bet selling out-of-the-money puts would be the number one options strategy. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The study states on pages 17 and emphasis added: Below is an excerpted reproduction of the study's table 2 for options that have fixed three-month expirations during both year and year holding periods: Option Strategy Annualized Return: Investing Ideas , Options. Want to share your opinion on this article? Disagree with this article? To report a factual error in this article, click here.
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