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Study Confirms What We Already Knew

The Performance of Options-Based Investment Strategies:
Evidence for Individual Stocks During 2003–2013

Link to full paper


Using data from January, 2003, through August, 2013, we examine the relative performance of options-based investment strategies versus a buy-and-hold strategy in the underlying stock. Specifically, using ten stocks widely held in 401(k) plans, we examine monthly returns from five strategies that include a long stock position as one component: long stock, covered call, protective put, collar, and covered combination. To compare performance we use four standard performance measures: Sharpe ratio, Jensen’s alpha, Treynor ratio, and Sortino ratio. Ignoring early exercise for simplicity, we find that the covered combination and covered call strategies generally outperform the long stock strategy, which in turn generally outperforms the collar and protective put strategies regardless of the performance measure considered. These results hold for the entire period 2003–2013 and both sub-periods 2003–2007 and 2008–2013. The findings suggest that options-based strategies can be useful in improving the risk-return characteristics of a long equity portfolio. Inferences regarding superior or inferior performance are problematic, however, as the findings reflect the Leland (1999) critique of standard CAPM-based performance measures applied to option strategies.

Evidence (charts based on data that goes back to 1986) that buy-write strategies (BXM) and put-writing strategies (PUT) outperform collar strategies (CLL) and simple buy and hold is widely distributed and well understood by experienced option traders. Those studies are based on index options and the study quoted above concentrates on individual stocks. But the conclusions are familiar.

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How Should a Beginner Approach Option Trading?

The following question seems rather tame, but it addresses a very important issue:

Is there a correct syllabus for new option traders?

Hello Mark,

I’ve just starting to read your Rookie’s Guide book, bought from Amazon. I also read several other options books, while doing my paper trading with OptionXpress with thinkorswim platform.

I also have joined an options course and what they teach are very basic, which is just Buy To Open (Call / Put) and Sell To Close (Call / Put) and pay attention to the candlestick chart for entry point. So making profit from that simple strategy. What do you think of that strategy? They didn’t teach any strategies mentioned on many options books.

Candlestick Charting

Candlestick Charting

But after reading couple of books on options, they all teach the Covered Calls as basic strategy, which from my understanding that one investor has to have real stocks in order to make the options trading. Do I need to buy real stocks? Is that true?

How about if we only open an options account, and didn’t have a real stocks to trade in that Covered Calls strategy? And why I can’t trade the Covered Calls in optionsXpress? Please help me.

Thanks in advance,
Aldo Omar

Paper trading is an excellent idea. It teaches you how to handle your broker’s platform and it gives you experience learning to make critical decisions — entering and exiting positions.

However, this course is a disgrace, in opinion. I do not care how respectable the course giver is, but these lessons are almost guaranteed to see their students go broke when using options. Unless they explain that the course is designed only to teach you something about options and that “buying to open and then selling to close” is NOT a strategy that you ever want to adopt, they are doing you a great disservice. I hope this course is free because it is not worth even that much.

  • First; A trader, and especially a new trader, cannot be expected to know how to use Candlestick charts. It is extremely difficult to “pay attention to” charts and come away with useful information. Think of this way: Candlestick charting is well-known and used my millions of traders around the world. Despite that, the data is clear: The average individual investor does worse than the S&P 500 index. The average mutual fund manager — someone who ears big bucks to pick winning stocks and beat the market averages — cannot beat the averages. Do not get trapped into believing that you can read one or two books on charting and know how to sue the charts. My conclusion is that it is far more difficult to pick entry points than your course teachers suggest.
  • Second; You are learning the simplest of all strategies, and that is a good thing because one should begin with the most basic concepts of options. However, it should have been mentioned as often as possible that buying to open and then selling to close is a death wish. Unless you (A. O.) have a proven track record of predicting which stocks will rise and fall, then you must not — for your financial well being — believe that you can suddenly start trading options and become a successful stock picker. Life does not work that way and using Candlesticks will not turn you into a successful stock picker. The professionals cannot predict stock direction on any consistent basis, and neither can you
  • Third; Even if you work diligently and learn to read the charts successfully, there is more to “buy to open” than simply picking a stock and correctly forecasting the direction of the stock price. Did they teach you that buying out-of-the-money options is not a viable strategy? Did they teach you to pay attention to the implied volatility of the options? In fact, did you learn anything at all about volatility and how crucial it is to an option trader? I assure you of this: If you but out-of-the money options and if you buy them when their prices are relatively high, you will ruin your trading account, even when you get the stock direction right. My advice: If you are going to play the “buy to open” game, at least stick with options that are already several points in the money when you buy them.
  • Fourth; I know that advanced strategies cannot be dumped into the lap of a beginner. Building a sound foundation in option basics comes first. But that is no reason to teach a strategy where the vast majority are guaranteed to fail.
  • Fifth; Yes, covered call writing is a sound basic strategy and yes, it does involve the purchase of stock (in multiples of 100 shares). However, it is still a bullish strategy and the covered call writer can still lose a lot of money if the market takes a dive. Obviously you lack the cash to buy stock. That is okay because there are other ways to use options to generate exactly the same profit/loss profile as writing covered calls. You will get to that in Chapters 13 and 14 in the book that you are reading (The Rookie’s Guide to Options; 2nd edition).
  • Last; The whole idea about using options is to hedge (reduce) risk and still give yourself a good probability of earning a profit on any given trade. Buying options based on Candlestick chart reading is not one of the paths to success. Sure some people can do it, but you don’t want to count on being one of them. Covered call writing is “better” for the new trader – but only when he can afford the downside risk. However, there are other strategies that I would recommend for you. At the top of the list is “credit spreads.” But please have patience. Don’t jump to the chapters on this and related strategies. Go through the lessons at your own pace and if possible, resist the temptation to trade until you feel comfortable.

I hate that course and the sad fact is that this is popular stuff taught by many people.

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Covered Call Writing

Writing covered calls is a popular strategy among newer option traders. One excellent reason is that it smooths the transition for a stock investor who is expanding his/her investing methods by entering into the world of options.

Covered call writing (CCW) is one method for reducing risk when owning stock, but it comes at the cost of limiting profits. Here are my thoughts on why someone may want to adopt this strategy. It includes both pros and cons.

Additional articles

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Keeping a Trade Journal

See my site for a blog post and a series of articles about making trade plans and keeping a trade journal.

It is very easy for us to think about a trade: make the trade, wait a while and then take our profit or loss.

It is very beneficial for us as traders when we have a good record of the thoughts that went into our decision-making process as well as the results of the trade. When we return to read our journal entries, we are removed from the time and place of the trade and can analyze the results as if the trades were made by another trader. We can learn from our past decisions.

The objective is discovery

  • Was your reasoning sound? Or did you make a poor decision?
  • Recognizing that you made a bad choice, you should be able to understand what went wrong and how you can avoid a similar mistake in the future
  • Did you choose a strategy that was appropriate at the time, or did you take a shortcut and rely on using your bread-and-butter strategy without any real thought?

Was the trade profitable?

  • If yes, did the trade plan help you earn that profit?
  • Were you just lucky and earned a profit despite making errors?
  • Is there a lesson to glean? Is there something you want to be sure to repeat next time?

Was the trade a money loser?

  • Did you make a mistake? What was it? Did you ignore risk management?
  • Many times, the trade was unlucky. Was that true in this example? Be honest.

Trade plan example: Writing Covered Calls.

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Investing in 2013

The 2nd edition of The Rookie’s Guide to Options has been published and is available at

Revised and expanded with even more detailed discussion.
Two new chapters: an introductory discussion on calendar spreads, and traps to avoid when exercising options.

Your father’s stock market

There was a time when diligent individual investors could hope to do research, perhaps visit company retail outlets (if they had any), or places where the company did business, and make an intelligent decision as to which companies were worthy of their investment dollars. If the company prospered and earnings and revenue increased every year, then the stock market rewarded investors with a higher price/earnings ratio and a significantly higher stock price. This process required years to bear fruit.

Our stock market

In today’s world, business leaders (the CEO) are rewarded for making the stock price move higher this quarter and this year. There is little emphasis on growth. Thus, there is far less incentive for us, the individual investor, to buy stock with the intention of holding for growth over the years. And it’s not only the CEOs who drive this need for instant gratification. Trader holding periods are getting shorter. Day-trading is popular. So is momentum trading (the idea of following the ‘hot’ stocks). This may not kill the idea of ‘buy and hold’ but other ideas seem to be more attractive for investors.

Add to that mix the idea that computer algorithms are increasing their share of the trading volume, and my conclusion is that much of the prices we see in the stock market come from factors that have nothing to do with the quality or long-term prospects of the company.

For all those reasons and more, using options to hedge investment risk makes sense. Why depend on the stock to grow well over the years when you can (for example) write a covered call instead of simply owning stock. This increases your chances of earning an acceptable profit, and far more quickly. If you want to avoid being at the mercy of traders and computers who drive prices higher and lower; if you are a non-greedy bullish trader who wants to increase the chances of making money – just in case the markets stop rising and begin to trade in a range; then writing at-the-money (ATM) calls offers an excellent opportunity to earn investment returns that exceed the needs of most traders.

What can go wrong? We must remember that writing a covered call is only a little less risky than owning stock and that a downside market can prove costly. However, if your plan is to hold that stock anyway, then writing covered calls does not involve any extra downside risk. We must also remember that this strategy places a cap on possible profits. However, unless your expectation is for the stock to make a dramatic move higher, the available profit (the premium collected from writing the ATM call) should look quite attractive, especially when considering the time required to earn that profit.

If you accept the premise (and not everyone does) that investing has changed and that there are too many unpredictable variables that affect the price of your investment, then collecting steady premium by selling covered calls is an alternative strategy worthy of your consideration. However, it does require a neutral to bullish outlook for the stock market.

This post was originally published by TradeKing.

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Less Common Adjustments for Covered Call Writers

Mark, One question: How about covered calls or naked puts; is there any other usable adjustment method besides rolling down or closing position?


As you know, these are equivalent positions, so I’ll answer as if you were asking only about covered call writing (CCW). Reason: It’s a far more popular strategy, although I urge covered call writers to consider writing cash-secured puts instead.

Each of these trades is equivalent to being short a put.

As an adjustment, consider these alternatives:

    a) buy a further OTM put to limit losses
    b) buy a longer term put to move into a calendar spread
    c) buy a closer to the money put to own a bearish position – changing your outlook
    d) Target bigger profits with added risk (I hope you don’t choose this) by selling a call, and going short a naked strangle or straddle
    e) Short some stock to own a delta neutral position

No single one is better than another. It all depends on how you want to ‘play.’ If you want positive theta, that limits your choices. If you are very conservative, that very much limits your choices and adopting this strategy was not the best initial trade for you. If very aggressive, you have different choices, with added risk.

But it is easier to just quit a winning (enough profit) or losing (enough pain) trade and open another. If you open that new trade in the same stock then you would be rolling. If a different stock, well then, it’s obviously just a new trade.

Don’t look for complications where there are none. If you don’t like a position, it is often best to exit.

Personally, I prefer the roll for the CC or NP position. Unless I am no longer bullish on this stock. I bring in more cash by moving the option to a lower strike and more distant month. Let me rephrase that. It’s what I used to do. I no longer sell naked options.

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You are not using options? II. Is covered call writing for you?

Recent commentary on this blog suggests that it is important to examine option strategies from more than a single perspective.

As a true believer that options can work wonders as risk-reducing investment tools, I often lose sight of the fact that most investors don’t use options and have a very negative opinion of them. When writing about a given strategy – or any options related idea – it’s important to consider why non-option users don’t want to be bothered with options.


A covered call position consists of owning 100 shares of stock and selling one call option. In simplistic terms this means that the stock owner has collected a cash premium and in return, accepts the obligation to sell that stock – with certain restrictions – to the call owner. These are the basic requirements (the nitpicker can find things that are not exactly accurate, but they are good enough to clearly define the option contract.

  • The stock is to be sold at the strike price of the option, and at no other price
  • The decision to purchase must be made before the option expires
  • The decision (whether to buy the shares) is made by the option owner
  • The option seller plays no role in the decision
  • Once the option owner exercises the call and the option seller has been assigned an exercise notice, the transaction is final and cannot be reversed


If the stock undergoes a severe price decline, you, the covered call writer can incur a large loss. The loss is almost as large as that of any other stockholder, but by writing the call, your loss is reduced by the premium collected.

Thus, there is substantial market risk, when the market declines.


Writing covered calls is a simple trade. The writer gains something in exchange for something else.

The covered call writer accepts a cash payment upfront. That’s referred to as the premium, and is the price paid by the call buyer to the call seller. That cash premium belongs to the option seller and is his/hers to keep forever.[NOTE: If you decide to repurchase that call option, you pay the then current premium. That has nothing to do with the premium that you collected when you sold the option]

The call buyer gets something intangible in return for the cash payment. He/she gets to collect every penny of the stock option value – above the strike price. If the stock is not trading higher than the strike price when the market closes for trading on expiration Friday, then the option has no value and expires worthless. The option seller’s obligations are canceled.
seFor example, if the option has a strike price of $40, and if the stock is $43 when expiration arrives, then the option owner has the right to buy stock at $40 and sell it at $43. In practice, the call owner is better off selling the call option and not bothering with the exercise process. The call owner, now the exerciser, then sells stock at the higher price, keeping every penny of the difference.

Without the call sale, those profits would go to the original stockholder. However, by selling the call option, those profits have been transferred to the call owner.

Note: The option owner does not have to hold that option until it expires. He/she may sell it at any time. More than that, it is almost always better for the call owner to sell, rather than exercise that option.


Stock prices do not always rise

When you write, or sell, an option that is out of the money (the strike price is above the current stock price), most of the time the option expires worthless.

Most of the time you earn extra profits (or reduce losses) when writing covered calls. But not every time. Part of the time the call buyer makes money that could have been yours. However, we never know when stocks are going to rise and when they will not.

By writing the call option, you agree to accept a cash payment – now – and agree to let someone else have profits above a certain price point.

This is a simple agreement. Many people find it attractive. It works on the principle that a bird in the hand is worth two in the bush. And it’s perfectly acceptable to believe in,and practice that way of thinking.

It’s also reasonable to seek huge profits – that do occur every once in awhile. It’s okay to take your chances on owning the stock without a hedge. After all, you did research when deciding which stock to own, and if you believe that your research will pay dividends, if you believe that you have a special talent for picking winning stocks,then of course you will not want to give up those potential profits. You will not write covered calls.

However, if you believe, as I do, that the ability to outperform the market with stocks election is limited to a small minority of investors and traders, then you may feel that accepting the option premium that comes your way when writing covered calls is beneficial.

There is no right or wrong here. There is only the decision: Do you want to trade possible profits – profits that may never arrive or profits that may be huge – for the option premium that comes when selling calls? It’s a personal decision. It depends on your reasons for investing. Some people seek steady growth, others seek to get rich quickly.

The purpose of this post is to clarify the situation for investors who don’t really understand how this strategy is supposed to work and what the covered call writer stands to gain or lose. The rest is up to you.

Please note: I believe there are less risky methods that involve adopting similar strategies. Those come with less risk and less reward. Again, they are not for everyone.

I believe the following is obvious. Nevertheless, please understand that nothing in this post should be taken as a recommendation to adopt this, or any other option strategy. I am presenting my opinion because it may prove to be helpful when it comes to using options. The final decisions are yours alone. Do not thank me for profits earned nor blame me for money lost.

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Covered Calls: Bullish or Bearish?


You said selling a covered call is bullish, I think it is bearish. By selling you are making a “bet” that the strike price is too high. Buying a call would be a bullish bet.


Your perspective is somewhat unusual – I’m not saying it’s incorrect – just that it’s different.

I also see that you don’t recognize that options can be used to hedge, or reduce the risk of owning an investment. To you, options are to be used only for speculation. You are free to use options that way, but you are losing out on some of the characteristics of options that makes them so special.

I consider this discussion to be important to the options rookie who is looking for a solid options education.

Without any market bias, these statements about a covered call position are all true:

  • The position is delta long
  • The position earns money when the stock moves higher
  • The position loses money when the stock moves lower
    • Those are NOT the characteristics of a bearish position.

      Profits are limited for the covered call writer

      • That is not bearish
      • It’s a trade-off. The stockholder collected a cash premium now in exchange for potential profits above the strike price later
      • Consider the trader who buys stock and sets a profit target. That’s a bullish trader
      • That’s exactly what the covered call writer does. He/she sets a sell price and collects a cash premium
      • A bearish trader would NOT own stock

      The wager

      Is the bet really that the strike price is too high?

      That is overly simplistic and tells me that you use options purely to speculate. By wring a covered call, the stockholder sells someone else the right to all profits above the strike price – for the lifetime of the option. In exchange he/she gets paid today.

      That’s not bearish. It is a ‘bird in the hand’ investing style. The trader takes the option premium now instead of possible profits later. It’s not a wager to be won or lost. It’s a trade. If the stock goes much higher, that’s a good result. The stockholder wins. From you speculative thinking, the stockholder loses. I do not understand how you can survive as a trader if you are not happy with a profit – just because you could have earned more money had you chosen a different strategy.

      I’m thrilled to write a covered call and be assigned an exercised notice. That’s a winning trade. More than that, it’s the best possible result – after I decided to write the covered call.

      The bullish bet

      Owning stock is a bullish bet. If the stock moves higher, the trader earns a profit.

      Buying a call option is a bullish bet. Yet, if the stock moves higher, there is no guarantee that the call owner will earn a profit. There may even be a significant loss.

      Owning a call may give the trader a chance to make money on a rally, but far too often the trader buys the wrong option (strike price too high) or pays too much for time premium (rapid time decay that hurts the option’s value when the stock price does not increase quickly enough).

      Leverage works both ways. An inexpensive call option can return a large profit, but it can also expire worthless, even when the stock has rallied.

      Buying at the money or out of the money calls is highly speculative, and it takes the right set of conditions to deliver a profit. If the calls are deep ITM, that’s a smarter play. However, I’m certain that’s not the idea you were suggesting.

      Thanks for sharing your thoughts.

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