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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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Selling Naked Puts: Accepting Assignment

One of the more difficult situations for naked put seller occurs when the option is in the money on expiration Friday. I have suggestions for both traders and investors.


One good strategy for you, an investor who wants to own shares of a specific stock, is to write (sell) one put option for each 100 shares you are willing to buy. By choosing an appropriate strike price, the trader is assured of an acceptable outcome. (Either buy the shares or keep the premium as a consolation prize.) At least buying stock was acceptable at the time the trade was made. If it ever becomes unacceptable (probably because the stock price has declined too far), the investor should repurchase the put option, forget about trying to recover losses, and move on to the next trade.

When the put option is ITM, accept assignment. Translation: do nothing and allow an exercise notice to be assigned to your account. Once you own stock, you may write covered calls or simply hold the stock. This plan works most of the time when you have a long-term outlook.

However, it may be a good plan for a long-term investor, but it is a poor plan for the short-term trader.


You, the trader, should have a different mindset, and almost never want to own the underlying stock. Do not accept assignment. Cover the short put position, regardless of whether you earned a profit or incurred a loss.

You sold the puts to earn a trading profit. When any trade does not work as anticipated, the winning trader cuts losses and finds another trade.

I know that the advice is often given that it makes sense to accept assignment on short puts and write covered calls until the stock is eventually sold and then begin the process again by writing a naked put. When the plan doesn’t work; when a severe bear market (or some company-specific news) crushes the stock price, the trader loses a lot of money. This is not how a trader operates. The trader is not someone who gets married to a position for the sole purpose of refusing to realize a loss.

A trader is someone with a short-term trading plan. That plan includes a target profit and a maximum acceptable loss. The trader takes that profit when it becomes available. The successful trader understands the importance of limiting losses and accepts such losses when they occur and never holds losing positions hoping they will eventually become profitable.


When you make a trade remember who you are and make a trade plan that is suitable for your investing style.

New (2014) ebook

New (2014) ebook

Writing Naked Puts

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Writing Naked Puts

My plan for 2014 includes the preparation of several low-priced ebooks, each dedicated to a specific option strategy.

The first one is available today, and the strategy is the sale of naked put options.


NOTE: As a general rule for traders, I prefer to recommend the sale of put spreads (or call spreads for bearish traders), rather than naked options. Nevertheless, the prudent sale of naked put options is a good strategy for most investors and for some experienced shorter-term traders.

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Selling put spreads. A new wrinkle

I did a bull put spread- just 2 contracts.
Bought GILD 7/16/2011 38 P
Sold GILD 7/16/2011 40 P

This is the first put spread I have ever done. I’d like to make sure I understand it.
[MDW:This is something to do before you trade, but let’s be certain that you understand NOW]

I own the 38 puts. So if the stock falls below 38 I can sell it.
[Yes. But remember that you bought it as protection to limit possible losses. You can sell that option any time before the close of trading on Jul 16, and the stock does not have to be below 38]

This lowers (limits) my potential loss on the spread to $2 per share if the stock plummets.
[The maximum value for that spread is $2. But don’t forget to deduct the premium collected when selling the spread: Your potential loss is reduced by that premium]

I sold the 40 puts, so if the stock falls below 40 I am obligated to buy it. It is a bullish trade, so I am believing the stock will be above 40 by the expiration date.
[I know what you mean, but for clarity, it is not ‘by’ the expiration date that matters. It is ‘at expiration,’ or the closing price on the 3rd Friday of July. That closing price determines whether the put owner will exercise and force you to honor that obligation.]

If the stock is above 40 at expiration the puts expire worthless and I keep the credit I received (net credit 38 cents per share).
[Yes. That cash is already in your account. And it is yours to keep NO MATTER WHAT HAPPENS. You may decide to spend some cash to repurchase the puts (I know you won’t, but theoretically speaking). But that 38 cents is no longer relevant. It is yours forever]

If the stock is between 38 and 40 the 38s will expire worthless and I will be assigned the stock. That is fine, I am getting it at a reduced price and I like the stock; OR CAN I SELL TO CLOSE THE 38s?
[The price reduction is ONLY the 38 cents credit collected earlier. That’s not much of a price reduction.

[You may sell the 38s at any time before the market closes on that 3rd Friday, if anyone is willing to pay something to buy them]

[With your emphasis on selling the 38 puts, I believe you are adding a new wrinkle to spread trading – keeping the shares. That’s worthy of further discussion – keep reading]

If the stock is below 38 what is best strategy? Since I like the stock I should allow the stock to be assigned to me, and then sell the 38 puts to close (before expiration).
[‘Best’ is not easy to define. In your scenario – keeping the shares, then selling the puts is a very unusual choice because the vast majority of those who trade put spreads have no interest in owning (or selling short) stock. They trade spreads with the intention of earning a profit. There is seldom an interest in owning shares. Thus, the question remains: why did you buy the 38s?]

    This reply arrived via e-mail:
    This is a bit of a hybrid. Given that I am willing to own stock, doesn’t owning the 38 puts provide some protection? Also, if the stock is below 38 near expiration, the 38 puts have value and I could sell them, thus reducing my cost basis for buying the stock?

[Yes. You are correct. Owning the puts provides protection – for a limited time. But that protection is NOT cheap.

Yes again. Selling those puts lowers the cost basis. However, not buying the puts in the first place lowers your cost basis even more (except when the stock moves well under 38) on those occasions when you do buy the shares via being assigned an exercise notice.

Traders who sell naked puts – don’t seek only that short-term trading profit. They are willing to own the shares at a better price (when compared with the stock price at the time the puts were sold) – and almost never buy protection.

You are doing both. You want to own the shares and you prefer to own protection. There is nothing wrong with that. I believe it is always a good idea to limit losses.

However, you are new to options and I want to be certain that you recognize the cost of owning puts as protection. Bottom line: It is expensive. The big question – and perhaps it’s something you have not yet considered – is: What are you going to do for protection after July expiration?

Example: If you own 100 shares and buy one 38 put (two month lifetime), paying $1, then the stock price must rise by more than $1 before you earn any profits. If you buy those puts every other month, then the stock must rise by $6 or 15% every year for you to overcome the cost of the put protection. It’s not so easy to find stocks that rise 15% per year, and when an investor does that, he/she deserves to make some money, not spend that 15% on insurance.

[This is not the place for details, but if you own stock plus puts, that is
equivalent to owning calls – with the same strike and expiry as the puts.] Do you truly want to own calls rather than stock? The answer should (in my opinion) be NO, unless the calls are significantly in the money.


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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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Exercising call options for the dividend

Some myths die hard.
Some never die.

Here’s a comment from a reader:

I read a few of your online articles about when call owners should exercise to capture the dividend. It sounds like it makes sense, but I can’t reconcile this information with other material I read online such as:

Person A:
“I find, if a covered call has even a penny less than the dividend being paid [in time premium], I can be assured of exercise.”

Person B:
“I recently shared with a friend my frustration over early covered call assignment at ex-div. I have been called out early several times. The most recent time was on CTL. I had a call over a month out that was assigned early. That nice dividend was gone.

My friend put me in touch with a Dow Jones Newswire reporter who is writing a Wall Street Journal article on call volume spikes at ex-div….and the guy on the short side of the call.

He asked me to post his info for anyone who would like to tell of their own experience and frustration.”

Person C:
“You sound like you want have your cake (the time premium) and eat it too (the dividend). I think you should accept it as a virtual certainty that you will be assigned when coming into x-date if the time premium remaining is less than the amount of the dividend. Why would you expect that the holder of the contract you sold (the buyer) not want the dividend for himself? Since that person is usually a market maker (with a very low cost of doing business, including cheap commissions and a low cost of margin capital) you will usually be assigned.

If you get to just before x-date and you think you will be assigned you can always enter a spread order to roll the option to one less likely of assignment.”

Person B:
“I’ve traded CC’s for a long time but new to trading for the dividend income.
The CTL option was over a month out so I really didn’t think much about early assignment. I won’t make that mistake again.”

Person D:
“For stocks with large dividends, a call-holder will often exercise the option in order to capture the dividend. This will be done when the option is in-the-money and the Intrinsic value plus the forthcoming dividend exceeds the time value of the call.”

Perhaps these call owners are being exercised, but not for the reasons they think and only Wolfinger is correct?

Some people refuse to believe – despite the evidence

There are people on this planet who do not believe man has ever gone to the moon. There was a time when ‘everyone’ knew that the earth was flat – before discovering, and finally accepting, the truth.

The people you quote are wrong. And it is so easy to demonstrate that they are not only wrong (as anyone can honestly be), but they are stubborn and do not allow the facts to get in the way of their ideas. And you can prove this for yourself.

Person A is not telling the truth. I refuse to believe that he was assigned on a call option with 49 cents of time premium – when the dividend was 50 cents. In fact it doesn’t matter how big the dividend was. If assigned with that much time premium, it was a gift. It was free money. But person A does not understand how options work and discarded his gift.

He has probably never been assigned on an option with any time premium remaining, but this is impossible for me to prove. However, what I can do is prove that he is either the luckiest trader on the planet or just not telling the truth.

      :You can find real world scenarios, but I’ll make do with a fictional example.

      I used the calculator made available by the CBOE and

      Stock price: $53
      Expiration: April 15
      Dividend is $0.50
      Ex-dividend date: April 1, or 14 days prior to expiration
      Volatility = 35
      Value of March 50 call (on March 31, the day that the option must be exercised to collect the dividend): $3.27

      Note that the call has $0.27 of time premium remaining, and the delta is 84. Those numbers tell anyone that this call should NOT be exercised to capture the dividend. The downside risk is simply too great.

      When you exercise a call, you are buying stock and selling a call. That combination of trades is equivalent to selling a put – same strike and expiration date as the call exercised. And you sell it for zero, collecting the dividend as the only payment for that put.


The former call owner now owns stock, will collect the $50 dividend, and has something he/she did not have before the exercise: considerable downside risk. The stock is $52.50 (when the stock opens unchanged, it is lower than the previous close by the amount of the dividend.

The former stockholder, who is rejoicing – not complaining as your sample traders do – finds that his/her position is gone. That trader has collected all the time premium in the call option (removing all downside risk), but did not collect the dividend.

Instead, your former stockholders are bemoaning bad luck. All they have to do is open the EQUIVALENT POSITION (to the one held before being assigned). They do that by selling the equivalent put option. [If you are not aware that being short the put is equivalent to owning a covered call position, read this]

What is the value of that put?

In this scenario, volatility is 35, the stock is $52.5 and there are 14 days remaining before that put option expires.

    The put is worth $0.62. In other words, the person who was denied the $50 dividend can probably collect $60 for the put. The trader is better off by $10. That is truly free money. And the best part of being assigned that early exercise notice is that it’s not necessary to take the risk. The trader can be happy to have lost the dividend but be out of a risky position. It a choice: Take the free $10, wait for a higher price for the put (risking loss of the sale if the stock rallies), or be safely out with a profit.

This is not a bad choice. This is not something about which to complain. The people who are crying over the lost dividend never understood options well enough to consider selling the put. In reality they do not understand well enough to be using real money to trade options. Feel free to tell any of them that I said so.

Tristan: This explanation is basic to understanding options and how they work. If you don’t completely understand, please, think about it carefully before submitting a follow-up question. Understand this concept, and you are on your way to being a trader.

Trader B

Some options should be exercised for he dividend, even when one or two months remain. They are low volatility stocks paying a substantial dividend. To prove to yourself that volatility matters, look at the above example using a volatility of 18 instead of 35. You will discover that it’s (almost) okay to exercise. And most people would, even though it is theoretically not quite safe enough.

Person C

There’s not much to say. He talks big, but is option ignorant. The market maker would always sell the put instead of exercising. Any time the MM can get more than $50 for that put, it’s free money – when the alternative is exercising.

He is correct that if assignment is not what you want, rolling is one way to avoid it. But in given scenario, you should want to be assigned. It’s exactly the same as being given a free put option. You may keep that put (hold no position) or sell it.

Trader D

He would have been ok, if he had stopped sooner. His first sentence is true. The second is gibberish.

Tristan: Wolfinger is not always right. Nor is everyone else always wrong. You merely quoted four people who know not of which they speak/write.

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Condors vs. Iron Variety

Mark: If you will, address an options trading question (maybe a rookie question) to which I’ve never found an answer.

What is the benefit of selling iron condors (bull put spread/bear call spread) over buying condors (bear spread/bull spread – puts or calls, but not both)? The profit/loss graphs of the IC and the condor are identical. Clearly, with the IC the cash remains in your account and is increased by the premium collected rather than paying for the condor and collecting a profit (hopefully) later on, but the interest earned on the funds is, at least presently, negligible. Also, it appears that there might be a slightly greater premium for an IC over a condor, but I don’t have enough of a statistical sample to draw that conclusion.

So, why are iron condors so popular while non-iron condors are rarely mentioned? Thanks, as always, for your wisdom.


That’s a very interesting question and the truth is I don’t know.

I believe it’s a trader mindset. I believe that most traders prefer to have the cash in their account (iron condor), rather than pay cash for a position (condor). In this situation, the positions are equivalent and there is no theoretical advantage to trade one over the other.

However, there is a practical consideration. Because the trader anticipates that all options will expire worthless (obviously only when the trade is held though expiration), there is an extra reward for winning: There are no exercise/assignment fees to pay.

When the condor buyer wins, one of the spreads is completely ITM while the other is worthless. That requires payment of one exercise fee and one assignment fee. We know that some brokers do the right thing and provide exercise and assignment at no cost to the customer. However, that is not a common situation. Thus, all things being equal, the iron condor is better by the amount of fees saved.

More on mindset

Covered call writing is very popular among rookie traders. It’s easy to learn and nearly all brokers allow their novice traders to adopt that strategy. Selling cash-secured puts is the equivalent strategy, and adds cash in the trader’s account, but most brokers don’t allow their beginners to make that play. That’s true despite the fact that the trades are 100% equivalent.

Where does trader mindset come into the picture? I can’t be certain, but I feel that most traders who get used to writing covered calls never make the effort to switch to selling puts – even when their broker would give them permission. There is a certain comfort in trading a familiar strategy.

I believe it’s the same with condors. More books are written on iron condors, more bloggers use iron condors as topics, and thus, people who adopt this strategy begin with the iron condor and never make the change.

In the condor case, it’s correct not to make the change, but writing covered calls is not a good idea when the trader understands the equivalence of selling cash-secured puts. What’s the edge? Fewer commission dollars per trade. To me, the other, and more important point is that it’s far easier to exit prior to expiration. when the stock rises above the strike, OTM puts become cheap (eventually) whereas it’s not easy to trade ITM, higher priced call options as a combination with stock.

Exiting not only locks in the profit, but it frees cash for another trade.

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Implied Volatility and Standard Deviation

Hi Mark, I have a few questions i hope you can answer.

1. Isn't holding a naked long call (as a result of locking in a profit or plain buying outright call) in general a bad idea? Reason I think so is because of the nature of IV: it mostly falls when the underlying is rising. So you have short theta and a big long vega moving against you.

And holding a naked put seems logical and natural.

2. Can IV be really considered as a Standard Deviation for a stock price? Same reasons to ask – why would a stock probability to be at a certain price range shrink just because the market moved higher? Why would it widen in case of a fall?



1.You are correct.  A rising stock price usually means that IV is falling.  Thus, any gains resulting from positive delta are diminished by losses from declining vega. Most novice call buyers miss that point.

You believe that it feels 'natural' to be short the put option and collect time decay. I also prefer to be short options (as a spread, never a naked option) because of time decay. However, I don't see anything 'natural' about being exposed to huge losses by selling naked options.  There is  nothing natural about that. [In further correspondence, you admit to having a big appetite for risk – and under those circumstances, selling options would feel natural].  Hedging that risk feels more natural to me – and that means we can each participate in the options world, trading in a way that feels comfortable.

However, the majority of individual investors – especially rookies – find that owning long calls feels natural: Limited losses and large gains are possible. That combination appeals to those who don't understand how difficult it is to make money consistently when buying options.  The chances of winning are not good when the stock must not only move your way, but must do so quickly. 

More experienced traders believe it makes sense to sell option premium, rather than own it.  Please understand: that is not a blanket statement.  There are many good reasons (hedging risk is primary) for owning options, but in my opinion, speculating on market direction is not one of them.

The problem with holding a naked (short) put option is that profit potential is limited and potential losses can be very large.  In addition, when the stock falls and you are losing money because of delta – IV is increasing and the negative vega is going to increase those losses. Although positive theta helps reduce losses – the effects of theta are often less than those from vega and delta.

Even though long calls and short puts are both bullish plays, they really serve different purposes.  Traders who want to own calls are playing for a significant move higher, while put sellers can be happy if the stock doesn't fall.  Put sellers have a much greater chance to earn a profit, but that profit is limited.  Selling puts is not for the trader who is looking for a big move or who wants to own insurance that protects a portfolio.

2. Standard deviation is a number calculated from data – and one of the pieces of data required is an estimate of the future volatility of the stock.

Yes, it appears that a rising market results in a smaller value for the standard deviation move, but in reality, SD decreases because the marketplace (and that is the summary of the opinions of all participants – the people who determine option prices) estimates (as determined by the prices and IV of options) that future volatility will be less than it is now.  You are not forced to accept that.  You may use any volatility number that suits to calculate a standard deviation move.

If you argue that it doesn't make sense for a mathematical calculation to depend on human emotions and decisions, I cannot disagree.  However, to calculate a standard deviation, it just makes sense to use the best available estimate for future volatility. Most traders accept current IV as that 'best' estimate.  That does not make it the best, it's just a consensus opinion.

If you prefer to use your own estimate to calculate a one standard deviation move, you can do that – as long as you have some reason to believe that your estimate is reasonable.


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