Trading like an Escape Artist: How I made money in October trading S&P Futures Options with 2x leverage

October was a scary month for stocks: the worst monthly S&P 500 return in seven years! And November is off to a volatile start as well! We haven’t even seen a real correction yet but apparently, the drop was bad enough for me to got inquiries from friends and former colleagues asking how I’m doing with our portfolio and if (and when?) I’m going to come back to the office again! Sorry, not anytime soon! As I detailed in the post two weeks ago, we are not too concerned about one month of bad returns early in retirement.

Some friends and readers of this blog were specifically concerned that my options trading strategy might have been hit badly by the wild swings. After all, I’m doing this with a little bit more than 2x leverage and with the market down about 7% does that mean we lost more than 14%? Of course not! To all the rubbernecks out there who suspect we had a bad car wreck in our portfolio last month, I’m happy to report that we actually made a small profit with this strategy in October! And continued to do so in November! How awesome is that!? Well, there were a few close calls but I was able to escape any major damage. It took some Houdini Skills (or luck???), hence the title image of escape artist Harry Houdini (Picture Credit: Lomography).

Let’s take a look at the details…

Recap: Selling naked put options

As I detailed in the two option trading posts a long time ago (see Part 1 and Part 2), selling naked put options means that we are (voluntarily) exposed to the least attractive return profile; unlimited downside and limited upside potential. Because not many financial actors want to tolerate that and because there is a huge demand for downside protection (buying long puts) from other investors, there has been a pretty persistent “insurance premium,” meaning that folks pay significantly more for a put option than its expected payout. This has been thoroughly documented, see for example a nice piece from the CBOE on how a put selling strategy has superior risk/reward characteristics than the underlying passive S&P500 index investment.

What I particularly like about the put writing strategy is that we can make money in sideways moving market, even slightly downward sloping markets. True, we give up the upside potential! But being retired we are no longer in the game of trying to hit home runs because we became financially independent (FI) a long time ago. But we definitely enjoy the more stable income from option writing, i.e., the fact that we can cushion the equity downside with the option premium, see chart below. This is for an unleveraged short put at-the-money i.e., strike price at or close to the current value of the underlying:

Return diagram from our option post two years ago. Writing (unleveraged) put options, we either outperform the index (regions 1,2,3) or we underperform the index but still make money (region 4).

In practice, I implement the strategy with (at least) three little twists:

  1. I sell “out-of-the-money” put options, i.e., those with a strike below (often significantly below) the current value of the underlying. This gives me enough “breathing room” in case the index goes down. Comes in very useful in a month like October 2018! 🙂
  2. I use leverage because the yield of the out-of-the-money options is obviously lower than the at-the-money options. But the risk is also lower, so I am comfortable with a little bit of leverage!
  3. I do this with the shortest possible horizon: Since there are three expiration dates every week (Monday/Wednesday/Friday), I sell options every M/W/F with the closest possible expiration day (W/F/M). For example, on Fridays, I would write options expiring on Monday, only one trading day after! On Mondays and Wednesdays, I sell options with just a two-day expiration on Wednesday and Friday, respectively.

Now the relative return profile looks a bit more complicated, see the chart below.

From the options trading post in 2016. Despite the leverage, it takes a very sharp drop to lose more than the index!

Now one can lose more than the index (region 1), but only if the index suffers a pretty significant loss.

Show me the numbers! How did we do in October?

Let’s look at our cumulative return chart below:

Cumulative return of the Put Writing strategy since the beginning of October. There was a small drawdown in October but overall, the portfolio was up!

There was one big drawdown in early October, causing about a 2% loss for the month. But there was a swift recovery back to just above zero on October 12, more on that later! But apart from that, the P&L chart is one nice straight line up. We were up by about 1.03% in October and another roughly 0.6% in the first two weeks of November (as of November 16). Not a bad return profile especially when compared to the S&P500, see the chart below:

Put writing, even with leverage, was a much smoother ride than the underlying equity index! S&P500 Price index in orange, Total Return Index (with dividends) in gray.

It looks like the small drawdown in early October correlated with the big drop in the index on October 10 and 11. But while the S&P500 recovered only a small fraction of the losses on October 12 and stayed down 5% for the month we were able to jump back into positive territory! Beautiful!

How is it possible to make money if the market is down so sharply?

Very simple! The market was down but never dropped much below my strikes. In other words, going back to the put option return diagram above, for the most part, we were in region 3 “Profit while the benchmark loses” and only once we got briefly into region 2 “lose but less than the benchmark.”  Never into the dreaded region 1 “Lose more than the index.”

As scary as the month of October may have been, the meltdown happened relatively gradually. Sure, there were a few days with drops of 1% and more, even two 3+% drops on October 10 and 24. But none of the sharp declines happened out of the blue like the scary February 5 meltdown earlier this year. Or the Chinese devaluation in 2015. In other words, the fear of a large stock market decline had already been priced in! The VIX (fear index) was already sufficiently high and it means that I was able to sell options with strike prices far enough out of the money that even the big declines didn’t pose too much of a risk.

How far out of the money? Let’s look at the time series of the S&P500 index vs. the strikes of the put options I sold, see the chart below. I plot the E-mini futures contract prices at 4:00 p.m. Eastern Time (gray line) versus the strikes of my puts. Sometimes I sell options at only one single strike price, but most of the time I sell at a range of different strikes, so, I plot the minimum and maximum put option strike. Notice that when the big jumps occur in the strike prices, it’s because the old options expired and I rolled into a new set of options every Monday, Wednesday and Friday. In any case, according to this chart, the index only dropped below my strikes once around October 11 and 12. The rest of the time we always made the maximum profit, which explains the cumulative return chart going up so smoothly most of the time. But even on October 12, when we ended up only slightly underwater, “only” half of the options lost money and the other half expired worthless (maximum profit for us).

Closing index value vs. the min and max option strike in our portfolio. Note the drop on October 10 and 11 and the October 12 in-the-money expiration of some of the options!

Small technical note: The index line in this chart is the S&P500 closing value at 4:00 p.m., (when the options expire) adjusted by a small margin (1 to 2 points, to account for the small difference between the futures and spot price). I do have the E-mini S&P500 futures closing prices, but only at 4:15 pm, a 15 minutes after the options expiration time. But for this exercise, I needed the price of the ES Future at 4:00pm.

Even the October 12 loss could have been prevented!

There was one occasion in the entire time span where I deviated (slightly) from my usual strategy. On October 8 (Monday) I sold puts with strikes ranging from 2,745 to 2,785 with an expiration on October 12 (Friday) instead of October 10 (Wednesday). Why? Because I knew we will on a flight from San Francisco to Seoul, South Korea on October 10, (part of our epic 7-month, 20+ country world tour), landing right around the options expiration time. The plane ended up landing just on time, so I could have actually rolled the contracts that day, i.e., let the Wednesday options expire worthless (the index closed just above the highest strike price of 2,785) and sell the Friday options with a much lower strike due to the spike of implied volatility. But I didn’t know that in advance and I didn’t want to bet on the plane landing on time. If there had been any delay I would have been afraid about having options expiring in the money while I’m still in the air, flying somewhere over Vladivostok, Siberia. Of course, Murphy’s Law struck and in hindsight, it would have been better to roll on Wednesday. Well, you win some, you lose some! Luckily, half the options expired worthless (=maximum profit for me) and the other half was in the money by only a few points. So, instead of wiping out a month or two of option revenue I “only” lost most of the income month-to-date.

But make no mistake! It was a scary month!

Kicking myself about the bad timing of the October 12 options wasn’t the only unpleasant experience. There were a few occasions of what I call “point landings,” where the equity index future dropped to within just a few points to our highest strike price. You make the maximum profit for the option but you came so very close to losing money:

  • On October 5, the index finished at 2885.57, the futures at maybe 2 points above that. That was the closest call in a long time with my strikes at 2885! Watching the last few minutes of trading that day was a bit like watching a basketball game in overtime! Never a dull moment in the ERN household!
  • On October 24, the index finished at 2656.10 after a late-session sell-off. Futures at around 2658, which is just 8 points above some of the strikes of my short puts! Close call!
  • On November 12, the index finished at 2726.22, the futures at around 2727.75, which is still comfortably above my highest strike of 2715. But a few minutes before the close, the S&P got dangerously close to my strikes. I was sitting at the breakfast table on the cruise ship, getting ready to get off the ship to explore Lifou, New Caledonia, but couldn’t really enjoy the food so much because I was glued to the screen and “cheering” for the ES E-mini contract to stay above 2715!
Apart from the loss on October 12, there were three more close calls where options expired worthless but very close to getting in-the-money!

Dr Ern Loves Negative Skewness

So, in other words, even though the return profile looks really nice in hindsight, the last one and a half months weren’t exactly a walk in the park! I’m just saying this to make clear that selling naked put options is not some kind of magical money-making machine. It takes some stomach to run this strategy successfully in the long-run! In fact, human nature is naturally very opposed to this extremely negatively skewed return profile, as I pointed out in a post last year: “We are so skewed!” If anyone wants to replicate what I’m doing, please start with a small account and some “play money” to see if this works for you!

So much for today’s status update on my options strategy. Sorry if this post got a bit technical! Maybe the normal ERN blog audience didn’t get much out of this post but I wanted to write a post for my option trading honchos (Bob Jane, John, etc.) with some additional details on how we did during this crazy time! Good luck everybody, embrace the volatility!

Please leave your feedback in the comments section below!

Picture Credit: Lomography

185 thoughts on “Trading like an Escape Artist: How I made money in October trading S&P Futures Options with 2x leverage

  1. Very useful, thanks ERN.

    The thoughts about short duration to limit risk are interesting. Warren Buffet took exactly the opposite position and wrote very LONG term (years) index options when markets were down, because he reasoned that markets will not stay down “forever” but traditional Black-Scholes valuations don’t account for that — option premiums keep getting progressively bigger with longer durations, despite what he considered to be lower risk.

    But of course then you will also need very deep pockets to cover the potentially very big margin fluctuations in the meantime — this strategy won’t work well with leverage.

    1. Thanks!
      Well, Buffett with his big cash hoard has very deep pockets. Also, it’s noteworthy that Mr. Warren “Derivatives are weapons of mass destruction” Buffett was using this same strategy of selling vol through derivatives.
      I like his general idea, too, but there aren’t enough instances where you can apply his specific strategy. I hope the next Global Financial Crisis is still year (decades?) away. 🙂

  2. I would assume that position management is also key. Maybe it goes without saying, but it’s not like you’re putting your whole nest egg on the line every three days.

    Did you hear about James Cordier at He blew up 290 managed client accounts during the Natural gas spike last week. Apparently they were short far OTM calls on NG futures and just got steamrolled.

    Not only did everybody get zeroed out, they actually went negative so the clients all owe the broker now. It’s not clear how much the “debit balance” is, and probably varies by client anyway.

    YouTube video updating clients on account status (gut wrenching IMO):

    Tweets linking to email notice clients received:

    Transcript from a previous interview about their “risk management” policies:

    To get completely wiped out like they did, it seems highly unlikely that they were following all of their own risk management rules.

    But I think it’s a really valuable reminder of the damage that can be done with leverage. By its nature, the type of black swan event that can blow you up happens VERY FAST.

    Trade carefully!

      1. Supposedly they were short some puts in oil too so…double whammy?

        Agreed: very similar to XIV, although that was an ETN and the prospectus was probably a little more transparent than this guy…not that anyone read the fine print in either case.

  3. ERN this is NOT for the faint of heart or Unsophisticated investors……99.99999% of your readers ought NOT to be doing this…Only someone like you can pull this off.. 🙂

  4. Do you have a formula for choosing your strike price? If yes, have you backtested the strategy based on it? Have you considered hedging the strategy perhaps with a back ratio spread or being long put LEAPs and creating a calendar spread?

    1. Backtesting is hard because I don’t have all the historical time series price data of all the differrent contracts (all expirations, all strikes).

      THere is no explicit formula but I try to hit a certain option yield (about 0.50 per trading day). But I also check the Delta, Gamma, how many standard deviations the strike is out of the money, (estimated) probability of loss, (estimated) Sharpe Ratio, etc.

        1. Haven’t tried them yet. I might explore their free trial and see if one can backtest what I’ve been doing.
          I doubt though that they have much more data available than what I already have: actual trades since 2011.

            1. You can calculate the futures returns via FUT = Underlying-Total-Return minus Risk-Free Rate.
              The challenge is the option pricing data, i.e., how much did the Date X expiration option with Strike Y cost on Date Z?

                1. Same issue: hard to get comprehensive options data for all the different expirations and strikes and trading dates.
                  At my past employer we did have the data but of course I couldn’t take that with me! 🙂
                  But we did perform back tests and you don’t lose your shirt even with the big moves if you have a proper risk model.

      1. I Ern thanks for the great info. Can you explain and or give an example of the approx (.5 yield per trading day you are trying to target)? I do not understand this or how to calculate it.

        1. I target an option premium of around $0.50 per trading day.
          So, here’s an example of a trade I recently did:
          The SPX is at 2538.
          On Monday, I sell 2 SPX options (100x multiplier) on the CBOE or SMART exchange at a strike of 2430 with an expiration on Wednesday. Price $1.10. I make $220 minus a commission of $2.65. On Wednesday, the SPX hopefully closes above the strike and I get to keep that money.
          Hope this helps!

          1. Karsten, how come you’re trading SPX now instead of ES?

            I’m assuming they’re functionally the same so it doesn’t matter?

            From what I can see, ES has two benefits. There is no margin account allowed for Aussie IB customers so I can trade ES with margin but SPX short puts need to be cash covered. ES has longer trading times

            1. Yup, I switched to SPX options. Multiple reasons:
              1: they are cash-settled. If they go in the money I don’t have to monitor the market around closing time, like I’d have to do with the ES futures options.
              2: commissions are lower
              3: they are more “margin-efficient.” With ES put options I have to keep sufficient cash in a segrgated commodity portion of the portfolio. With SPX options I can use the ETFs, Mutual Funds, etc. as collateral and hold only minimal amounts in cash.

              1. Thanks for the explanation. Just checking, are you now trading SPX futures options or just options?

                Maybe I need look into switching too.

  5. “human nature is naturally very opposed to this extremely negatively skewed return profile”

    I thought it was the opposite way around. I think buying OTM puts and losing money day after day in the hopes of one big win is much more difficult for most investors.

    “couldn’t really enjoy the food so much because I was glued to the screen”
    I imagine not paying attention to it would help you stomach the volatility and allow you to enjoy your FI life at the same time!

    1. Zachary: I guess we’re wired the same way. Buying OTM protective puts you’ll lose money almost all the time but you’ll be amazed how many institutional investors want this…

      And agree: sometimes it’s best to not look. Ignorance is bliss during the volatile swings, especially intra-day. 🙂

      1. Hi ERN,

        I glad I found your blog!! I also used to work in the Asset Management business also before retiring and slow travelling around the world with my wife (seems we’re following your footsteps). We just started this at the end of September.

        I also trade equities and options – writing strategies but no naked calls, I can’t stomach the risk, I’ve also moved away from leverage now that we’re retired.

        Institutional money is funny, they ask for the insurance to protect against these events but they also hammer you if you’re below the benchmark.

        That is my real name and people do call me Ern. 🙂

    2. “human nature is naturally very opposed to this extremely negatively skewed return profile”
      Some examples of things people buy to avoid negatively skewed return profile are all insurance policies, extended warranties, buying (rather than selling) lottery tickets, gamblers in casinos (rather than taking the house’s side).

  6. Hey ERN, thanks for the update! You’re better than me buddy. I’ve been trading options for over 18 years and I still can’t stomach the risk of naked options. You’re my hero ha ha. It’s good that people can see the “benefits” of options during down months, but also the “risk”. It’s not for the faint of heart, but that’s why I like them. Options force me to be a better version of myself. And oddly enough, I trade options because I hate losing money. FYI: I’m a fellow FIRE member who also trades options. I passed you so many times at the Orlando, FinCon, but failed to say hi. Sorry about that. I gotta run, but here’s to more options success for you…

  7. I would like to watch the energy in the ERN household during trading. Haha! “Watching the last few minutes of trading that day was a bit like watching a basketball game in overtime!”

  8. You mention that you could have avoided the 10/12 loss by selling the Wednesday 10/10 put, but assuming you sold a similar amount of premium wouldn’t you have sold a much closer strike expiring on Wednesday and loss more that day?

    Also how did you recover the 10/12 loss so quickly, are you holding the future once assigned until getting back to the strike price?

    1. Yes, I also want to know how you bounced back so strongly after 12 October. I also think you must have held the long futures position.

      1. No. Simply from going deep in the money on the 2785 and slightly in the money on the 2745 (Thursday) to Out of the money on the 2745 and slightly in the money on the 2785 strikes did the trick.
        Remember: so close to expiration, the puts act almost like the underlying when they are in the money. Delta becomes essetnailly 1.0

        1. OK, so you were lucky that the index recovered before the expiration and the return curve is the P&L every day whether realised or not?

              1. Very nice post! The monthly put writing strategy has very different properties than my approach. Much higher equity beta.
                I’m surprised that the annualized alpha is so low. I would have thought it’s higher than that. Have to check that myself.

    2. The premium is a function of time to expiration and the strike (and other things, like implied vol). Of course, I would have received less premium for the Wed puts but I’m happy with receiving only half the premium M->W and the other half W->F. I don’t recall the exact strieks I would have sold at for the W expiration, but they tend to be similar for a given p.a. option yield.

      You recover the loss so quickly becuase once the options are at the money or close you have a high Delta. I never hold on the underlying very long. In fact, in this case, I already sold the ES a few minutes before close to hedge out the 1.00 Delta of the in-the-money puts.

      1. Hello Big Earn,

        could you explan the last passage some more?

        My understanding until now was that you never buy your sold/written puts back but leave them until time is up. Have you changed something there?

        And I would have another question. As I live in Germany we have restrictions with new tax laws since 2021. Since then you can only balance losses up to 20000€ with realized gains. Of course all gains have 25% tax on it.
        Is the option writing strategy still reasonable with that restriction?

        In Option Writing 2 or 3 you calculated that you have 60% losses on all realized gains. Adding the tax this would result in 60+25% losses on all realized gains. Still >0 but not much.

        Best Regards,

        1. Is there a way to get around this, such as using a company for trading? Otherwise, all trading would be really disadvantaged.

        2. Could you just limit it to a smaller scale such as 1x SPX puts ($150kish) to limit your losses depending on what else is in your taxable portfolio?

  9. Thanks for the update and shout out. I may be self-ish in saying this but I hope for more articles on options in the future.

    I am but one of your deciples and I feel like I’m learning more and more trading every day.

    Options trading is really fun, I look forward to it every expiration day (unless my options are ITM). It’s easier to buy and hold index funds when there’s something to play with.

    Sorry again I couldn’t make the ChooseFI meetup. I had no idea it was on until it was too late to pull out of my plans.

    Please let me know if you ever come to Sydney again.

    1. Thanks Bob Jane! It took me a while to write something on option writing again, but the great discussion on the other post gave the push to post something again!
      Let’s get together next time we’re in Sydney!

  10. Ever considered options on the VIX? I made a few hundred when I bought VIX puts in mid-Oct when the VIX hit 23 and sold them for a 50% gain in early Nov. when VIX dropped back down to 18. Today VIX hit 23 again so I’ll see if I can repeat the feat (with play money I can stomach).

    The theory is: When VIX is ~12 it can only go up. When VIX is ~23 there’s a near certainty it will go down several points sometime in the next 2-3 months (see charts). Unlike the indexes, VIX is forced to revert toward its mean because if it stayed too high or too low for too long, demand for probably-profitable condor strategies would drive IV back down or up.

    If course, VIX could hit 50 tomorrow, but with a long option position and plenty of time to expiration, I’ll wait it out.

    1. I like that idea. I would never sell call options on the VIX (same skewness problem as the Nat Gas debacle). But buying them as a hedge against losses in the put option selling is something I’d like to consider in the future! Especially when the VIX goes down to 10 to 12 again it’s time to buy!

      1. I’m going to play devil’s advocate on this one. First, don’t think VIX can’t stay low for an extended period of time. 2005, 2006, and 2017 are the three years since 2001 that I see this has happened. Second, why buy options that will offset gains from the SPX put writing as opposed to simply decreasing your position size on the naked puts themselves? It’s really compounding one speculative (although I wouldn’t call it that since the odds are in your favor) bet with another–the latter requiring an outsized VIX move to pay off and recoup all the small losses.

  11. Thanks for the great info. I’ve done only covered calls and buying puts on positions I own.

    It seems to me with naked puts you could lose a lot of money very fast if you get a black swan event. How do you protect against that especially with the market volatility now – on the one hand, you get good prices selling puts, but on the other hand, the prices are high for a reason?

    1. I have thought about hedging the extreme downside and there are two obvious routes:
      1: Buy an even deeper out of the money put to hedge the downside.
      2: Buy long exposure to the VIX
      Both should ideally be done only periodically when vol is low.

      1. I guess you would cash in the longer term put if you suffer significant losses on the short term sold puts. But what if the market then continues to go down? Do you buy a new put despite the high volatiility? Something I have been wondering is why not also sell calls, especially when volatility is high? Then if the market goes against you you only lose half as much. I know that calls won’t bring much income when volatility is low and likely the market will go against you then.

        The usual solution is just to sell put spreads instead of naked puts but that cuts the income a lot of course and given your experience so far wouldn’t cut the losses much. I guess the bottom line for me is I don’t like this very skewed distribution of returns even though the idea of “printing money” by creating securities is attractive.

        1. Never sell a naked call, unless it is part of a spread or other limited risk formation. A naked call is the most dangerous position in all of optionland because the potential losses are unlimited. At least if you sell a put on a stock that goes to zero, you have a zero boundary limiting your losses.

          When you buy an option, you risk 100% of the amount spent. When you sell an option, you may be risking thousands of percents.

      2. #1 got me thinking about the leverage discussion in Part 2 (?) of the “Passive Income Through Option Writing” mini-series. If you’re selling puts at 3x leverage then you could cut that to 1x by purchasing a long option at a strike price 2/3 that of the short.

        But this should not necessarily make you feel any better. If you then sold 3x the number of SPREADS (long and short options) than you otherwise would have sold naked puts, then you’d be in 3x worse shape on some pretty major market declines despite having identical leverage.

        So the risk is not just about total leverage. Any thoughts?

          1. You can come up with scenarios where vertical spread plus more leverage will do worse or better. It’s really all in the option greeks of the overall position. That’s why I haven’t done this in practice yet.
            Before ever doing the vertical spread I’d certainly consider the long VIX futures. That would have worked beautifully in all instances where I lost money with the short puts before.

  12. Hi Big ERN,

    I have been selling credit spreads since April with a small portion of my portfolio (less than 5%). I essentially dropped to a 1% gain for the year after October (ouch!) However, I still feel option selling is such a great complement to a low cost index portfolio. I’m glad someone who has achieved FI and someone so knowledgeable in finance is discussing this strategy. As other comments have mentioned, this needs to be used with CAUTION. At one point I was up over 30%, but leverage is a double edged sword. I learned the hard way in my 20s using some serious leverage to trade FX, so I knew that the 30% I was up at one point (annualized something like 269% at the time) was not sustainable.

    For readers who want to learn more about options trading. I would recommend OPTION ALPHA blog /podcast /resources.

    Thank you for such insightful posts!

    1. Thanks and thanks for the option alpha blog link. Looks interesting!
      Yeah, with option selling there is a bit of “the Lord giveth, the Lord taketh” and I’ve seen 8 months of option revenue wiped out in 2-3 days. August 2015 and February 2018. But it’s still a neat strategy for income generation in FIRE!
      Thanks for stopping by!

  13. ERN,
    I like the idea of being on the selling side of insurance for once. But, for those of us who are not as wise, or experienced, as you are:
    Are there any funds (that you would consider investing in) that employ a similar scheme? I.e., aim to replicate the performance of the CBOE S&P 500 PutWrite Index.
    If not, perhaps this is a business opportunity and a way to supplement your income in “retirement!” (you could be collecting the fees rather than paying them. I’m only half joking…)
    Absent a suitable way of outsourcing this work, is there an options simulator that you could recommend? A low-risk environment where I can learn more about options and the mechanics of this type of trading seem like the next-best step.
    Thanks and keep up the good work!

    1. As another commenter just posted PUTW is a WisdomTree ETF that does the monthly option roll. I’d prefer shorter duration and also like to hold Muni bonds as margin to increase the yield.
      So, I’m definitely thinking about maybe offering my methodology as a product at some point in the future.

  14. I did not make it through October quite so unscathed but have been doing all right over the year with a similar approach. I’m always interested to read about how you’re faring with this and see what I might want to be thinking about differently.

  15. Very interesting. I have a few questions since I never traded options. Are you only trading options on the E-mini futures? and why are you using that? what about put options listed on the SPX Index or other indices? are those too expensive in terms of bid/ask spread or too illiquid? tx!

    1. I will give it a go to answer your questions but one caveat is I am a newbie to this.

      1. E-mini futures allows leverage via selling naked. At least from what I understood, I couldn’t sell SPX puts without it being backed up by the notional amount.

      2. I think you got it right regarding other indices. SP 500 Eminis are probably the most liquid and has tighter bid/ask spread.

    2. Currently, only the puts on E-Mini. I have to pay for the data subscriptions at Interactive Brokers and CME traded E-mini options give me everything I need. Good b/a spread, low fees, just one one data feed/subscription.
      But people have been running this strategy successfully with SPX options.

  16. Great post! Always enjoy reading your technical pieces. How do you think about tail scenarios with this strategy? Say, a repeat of 2008 where markets drop ~40%, and your 2x-3x levered positions drop ~80-120%?? Thanks!

    1. From what I understand, Karsten said the strategy would have survived 2008.

      1. You only start to lose money when the index drops below your out of the money strike. So you don’t lose exact 2-3x the market drop.

      2. The premiums are rich after a big drop.

    2. Good question. in 2008 the market didn’t drop by 40% all at once. It happened over time. So, as long as you sell options far out of the money and with short time to expiration this strategy will do OK.

    1. I was wondering about the same!!! G20 summit in Argentina probably. I’d suspect if USA/China declare the talks about trade have failed and threaten new tariffs then we’ll lose the recent gains pretty quickly…
      Let’s cross our fingers we make it in one piece to Monday! 🙂

      1. Uh oh, now I wish I had been more conservative with my strike.

        Within a few minutes of selling, I could have closed out the trade for the usual premium. Hope my greed doesn’t punish me.

        Yeah, crossing my fingers we all make it through Monday unscathed.

          1. I was so relieved things broke our way that I took the money and ran. Made out like a bandit with the premium I received but I can’t help but think it was all just luck from my end.

  17. Again a very interesting post…Would say that unless one trades these strategies one self, they are only offered tailored to institutional investors but if you were to proceed a cooperation with an institution to replicate your strategy I would say that the most efficient way would be by offering it in a certificate or a note format (guess you know that already).

    Still, would be interesting to hear which if any product you would recommend as an alternative and which is already out there. Writing on a monthly basis seems to have its disadvantages and then of course the costs of trading has to be kept to a bare minimum if you do it very frequently.

    Thank you for another very interesting post!


    1. The ETF with ticker PUTW charges 0.35% annual fee. And the principal cash doesn’t earn much interest.
      I think the most efficient way of offereing this as a product would be whrough separately managed accounts. One would have to set up an RIA business first, though.

      1. You can open a hedge fund using this strategy. That’s more efficient than managed accounts by far. Also with a hedge fund you can invest IRA money through a self directed IRA custodian. This is precisely what I have done lol.

  18. Has anyone been able to find any information on if CME will be closing the futures and futures option market on 5th December 2018?

    What would be the strategy if there is a closure? Sell the Friday put on Thursday and accept one less trading day of premium, or sell the Friday put on Monday?

        1. Er, not much I guess? I assume it’ll end up being something like a week of Fridays, in so far as each time will just be 1 trading day until expiration. Mon sell Tues, Thurs sell Fri, Fri sell Mon as usual?

          I actually have no idea how an unexpected missing day affects normal expiration choices, so I’m probably going to be figuring this out on the go as you are.

          1. Re unexpected closures. Seems like a question for Karsten?

            Out of fear, I closed my Monday put just a couple of hours ago to lock in the huge premium that I received.

          2. Last time that happened must have been in 2007 when President Ford passed.
            Again, my suspicion is that Mon->Tue, Tue->Fri would be my preferred option sales.
            Good luck and happy trading this week!

        2. I believe the Wednesday options will have to use the Tuesday close as their settlement value. So, the Wed options just got their time to expiration cut by one day.

          The strategy would then involve selling the Wednesday options on Monday and the Friday options on Tuesday.
          One small issue would be what happens to the margins? I suspect I need to pay margin interest because for 24h I’d have twice the exposure than I normally have. Have to mull that over…

          1. Thanks for clarifying the mechanics of what to do when trading closes. This will help during Xmas closures I’m assuming too.

            So much to learn from you. 🙂

            1. The difference between the holiday schedule and this one is that the holidays are known already in advance. If Christmas Day falls on an Options expiration day then that expiration day is just shifted by a day.
              But now it looks like Tuesday is the expiration day (the day before, it already shows up as Dec 4 expiration on my IB smartphone app). But there will be no Thursday expiration. I’ll have to write options Tuesday to Friday now.
              Well, you learn something new every day! 🙂

  19. Hi, ERN! I’ve been trying out your strategy since April but because I don’t have the ability to write options on futures, I implement the strategy with put options on the S&P 500. These also expire on M, W and F, and they also are considered 1256 securities and taxed with the 60/40 long-term/short-term rule.

    When you say you use 2x or 3x leverage, does that mean you just have two or three contracts written at any given time?

    1. It means that he has 1/2 to 1/3 of the face value of an S&P 500 futures contract in cash in his account per contract that he writes. So, with the S&P currently at roughly 2500 a futures contract’s nominal value is $125k (50*index). So, he would have around $40k-$60k in his account for each put option contract he writes.

    2. I have since transitioned over to writing SPX options, just like you. They are larger contracts (100x instead of 50x) but I like the SPX contracts so far. Less of a hassle when they expire ITM: they are cash-settled, while the ES options are settled in ES futures.

  20. Merry Christmas Karsten!

    What happens if a put option expires ITM the same date as the future expiring?

    I came across the situation where my short put was close to expiring ITM when the 21 Dec future was expiring.

      1. Karsten, I apologise for the stupid question but does cash settled means that I would be buying 50 x the index and need to have the amount to cover?

          1. Cool, so functionally the same as normal then.

            As an aside, these last couple of weeks have been crazy volatile and crazy lucrative. Fingers crossed we make it until Monday to bank all the sweet premium.

              1. Happy New Year!

                Thank you for teaching us so much in 2018. I am so glad to have found your blog.

                I escaped with all that sweet rich premium but now they seem to be back to normal.

    1. Depends on what you want to learn:
      Option Math? The book by Whaley:

      General option trading education:

      Trade ideas? Without personally endorsing them, but I know a lot of people follow TastyTrade

      Trading platforms? I personally use and got to like it very much over time. They also have some free education content.

  21. Can you clarify, are you selling spx Monday morning (expiring Tuesday), and then selling Wed morning (expiring) Friday?
    I’ve read a few different opinions on weekend premiums, but unsure if the minimal time decay is worth it. I’d love to hear your thoughts.

    1. I sell a new round of options a little bit before the expiration of the existing ones. The last batch expired on Friday 2/15/19. I sold the next batch of options expiring Tuesday (Monday is a holiday/Presidents Day) a few hours before the Friday expiration.

      I have no problem with the lower premium over the weekend. Clearly, there is less volatility over the 3 calendar days (Friday-> Monday) or even the 4 calendar days (Fri->Tue). There are no earnings releases or macro data releases on Sat/Sun.

  22. Karsten, I understand the strategy is to sell options with the shortest time until expiry but I was wondering what I should do if I go on holidays and won’t be able to trade or don’t want to detract from the holiday to trade.

    If I sold a put that is 3 weeks until expiry, would I still be looking for approximately 50 cents premium per trading day?

    1. What you don’t want to sell options while you go on vacation? What’s wrong with you? Haha, just kidding!
      But then again, when I was cruising in the South Pacific I would do my trades in the morning before breakfast! Or in Europe, do the trades after dinner. So, depending on the time zone, it’s pretty easy to quickly do the options trades even while on vacation.
      If you want to go offline completely you can certainly also look for the longer-maturity options targeting a certain time value per day or per annum.

      1. Thanks for the answer Karsten! While I have you here before your next world tour, a question about you moving onto trading SPX options instead.

        Are selling SPX put options, or SPX futures put options?

        Also where will your world tour take you this time? 🙂

        1. SPX index options (100x), NOT the SPX futures put options (250x)! Big distinction!

          This time we’ll head to Southern Europe (Spain, Portugal, Italy, Greece, Croatia, France) and then Germany before heading back! So, I can trade my options right after dinner local time! 🙂

          1. Thanks for the clarification.

            That trip sounds amazing. Your blog is a true inspiration for FIRE. Not only do we get the robust math but your world tours are also inspirational in showing that FIRE is something worth aiming for.

  23. GIven that you’re selling only 2 trading days to expiration, how do you spread out the strikes without risking the possibility that the market won’t move and you’ll lose significant time required to get your requisite position size (or is it just a matter of luck)? If I were selling monthlies then I might sell every X days over the course of 28-35 days and then move onto the next month but that doesn’t really apply here because the premiums are evaporating so quickly.

    1. I don’t think he’s spreading out the strikes. I think it’s a single, multi-contract position in SPX sized according to his capital allocation target (2-2.25x). For example, if his portfolio is 1M, 8 2-DTE SPX contracts at ~5 delta (2830 strike) will achieve this.

      It’s an interesting approach vs laddering in small positions to approach capital allocation targets. It has three key differences: 1) ensures higher continuous capital allocation, 2) forces capture of all theta as opposed to taking profits early (unless it misses via ITM expirations), and 3) trades VIX expansion risk for gamma risk.

      Using today’s market for example, a ~5% move in VIX coincided with a -0.33% move in SPX. My ~45 DTE 5 delta options felt that move in their unrealized P/L quite measurably. However, my 2-DTE 5 delta SPX positions expiring today as part of my experiment to replicate Karsten’s methodology barely felt it. They’re almost binary – at current VIX levels it’s essentially banking on SPX not dropping more than 2.7% over 2 days.

      This approach is susceptible to whipsaw, which Karsten pointed out in part 3 of the mini series. The laddering approach, while less susceptible, has a different inefficiency – VIX contraction can push many small positions into profit targets. While this is a profitable event, if the approach is to ladder into exposure it’ll take some time to ramp up a portfolio’s theta decay / capital allocation. If a VIX contraction just occurred, it’s probably safer to ladder back in.

      1. In the paragraph above the first “S&P 500 Index vs. Put Strikes” graph, Ern writes “sometimes I sell options at only one single strike price, but most of the time I sell at a range of different strikes,” Also in those two graphs sharing the same title, the minimum and maximum strike prices are shown.

        1. Again, going back to my earlier explanation, that’s because the SPX index moves throughout the day and I sell (potentially) at differernt times during the day. Not always but most of the time! 🙂

          1. Here’s the dilemma I don’t fully understand. Suppose you aim to sell X contracts three times per week. If you spread them out then perhaps you capitalize on market movement. If the market doesn’t move, though, do you just sell the rest at the end of the day? For options with 2-3 DTE, you’ll lose lots of premium waiting several hours. How do you do this in a systematic manner?

            Or do you do this on a discretionary basis? In this case, surely you are right (lucky) sometimes and wrong others.

            1. Again: I’d ideally sell the new options exactly at the expiration date/time of the existing ones. If I see that the existing ones expiring today at 4pm EDT are far out of the money I already sell throughout the day, even before the option expiration time.

              1. In a previous comment, you said “in practice… I spread out the trades over 3-5 trades that day. Given that the underlying moves… I will sell at different strikes throughout the day.”

                How do you do that? Some days are more volatile than others. If you get a non-volatile day and you’re waiting all day for the volatility to come, then by the time you come to this realization a significant portion of your time to expiration will have passed and the available option premiums will be cheap.

                If your threshold is low enough to avoid the circumstance I just described, then on the really volatile days you’ll have sold all your puts early on, which won’t help much with defense on the big trend days.

                This is the omnipresent dilemma about legging risk. I don’t think there’s a right answer: I’m just asking how you do it. Many people just sell in a “discretionary” manner, which is to say they do it without good rhyme or reason. That’s me right now. Having an approach that sometimes works and other times doesn’t is where I eventually want to get back to.

                1. On Monday, I sold options with an expiration on Wednesday, April 24 at 1:00PM PDT.
                  I sold the options on four different times on Monday:
                  7:13:30 AM
                  7:57:25 AM
                  9:50:02 AM
                  11:33:27 AM
                  (all times PDT).
                  Each time I sold a put with 2DTE plus a few hours. So, your statement “a significant portion of your time to expiration will have passed and the available option premiums will be cheap” is absolutely incorrect. Sure, there’s a little bit of time decay on Monday but they all still have 2 full days left. Are you confusing the dates? Do you (incorrectly) believe that on Monday April 22 I sold options with the expiration on April 22?

    2. Strictly speaking, I don’t spread out the strikes at all. If I were to roll my puts on Monday 30 minutes before market close I’d roll them all at once at the strike that I see fit at that time.

      In practice, however, I spread out the trades over 3-5 trades that day. Given that the underlying moves and all the greeks and the option yields, this will mean I will sell at different strikes throughout the day.

      1. Hi Karsten, I love this discussion! I’m very new to options trading (as in less than one month of experience) so I feel like you are my options trading professor.

        I find myself doing something very similar on my trades. I don’t usually wait until my existing options expire before selling the next batch of two SPX puts. If the delta moves below ~1 on my soon to expire puts, I figure I can risk selling the next batch early. Sometimes I even do my trades in the morning several hours before market close if my existing puts are way OTM. In my mind I was telling myself “Karsten wouldn’t approve!” But now I see you do the same thing!

        1. Haha, thanks for the compliment!
          I would also prefer to just buy back the old options before selling new ones, but I normally let them expire and save the t-cost. And I don’t have to spend the $0.05! It adds up over time! 🙂

          1. My thoughts exactly! I let all my puts expire worthless to avoid incurring an extra trade commission and to avoid throwing away the last $.05 per option. With theta decay moving at the speed of light on the expiration date, seems like just throwing money away to sell to close.

            1. Well, I did just that and had to realize that SPX monthly only settles the NEXT day at opening!! There seems to be also some significant moves happening exactly at the opening print – it’s not just the last closing! A lot of additional risk for not much money… I will try to close them the evening before. SPX weeklies seem to settle end of day though.

              1. Yeah, that one settles at the opening of that 3rd Friday.
                I’d gauge that half of the risk from the Thursday close to Friday close comes from the move Thu-close to Fri-open. And the premiums for that contract reflect that.

  24. Please ignore. I’m not sure how to subscribe to the comments besides making a comment so that’s what I’m doing.

  25. Hi ERN, you mentioned that you would entered the trades over the day. Are there any “trigger” points (e.g. VIX above/below a value) or how do you assess that the current price is a “good” price? Or the trades are just random? Thanks!

    1. Spreading trades during the day is to spread out the “intra-day sequence Risk”
      I almost always do that if the old options are so far out of the money that there’s no risk that I’m getting caught with twice the delta exposure if there’s a late-day market meltdown.
      So, the trigger works more the other way around. Always roll throughout the day UNLESS the old options are at risk. Hope this helps! 🙂

      1. Thanks for the reply.

        Can I clarify the following:

        1. The “old options’ refer to the (1) previous trade (on the M,W,F) or the (2) options sold earlier in the day? If it is (1), does that means there would be times you would not open a new trade?

        2. If it is (2), what is your risk assessment in terms of determing that the old options are sufficiently OTM? Percentage wise from the underlying?

        3. In the current market environment, strikes with about $1 premium for 2 days is so far out of the money. For example on 12 Aug around 9:09 AM CT, with the VIX at 20.04, the SPX was 2894.01 and the 2760 short strike (2.7 Std dev and 4.63% away from 2894.01) was able to earn $1.10 premium. If it were you, would you sell at a similar strike or nearer to the money, taking advantage of the higher voltility?

        4. Building on above query, if not mistaken, I recalled from the “options” series, while you mentioned you would target a rough $0.50 premium/ day, you would also look at the std dev and how far away from the underlying. Do you have a “maximum” std dev. and distance as a guideline, assuming the “minimum” premium is met?

        Appreciate your sharing. I would really agree this is not for the faint hearted. Simple method but not easy.

        1. All great questions.

          With old options I mean the ones expiring that day. New options are the ones written that day. I open a new trade every M/W/F.

          Sufficiently out of the money means in terms of Delta, Standard-deviations, etc. You can’t do this as a fixed number because 20 point OTM may look super-safe when vol is low or really scary on a volatile day.

          3: I try to sell around the target price. The example you gave, I would have sold at exactly that strike: 2760.

          4: I decide that on a case-by-case basis. There is no hard rule. If there were, I’d just write a trading API on IB and never touch the computer again. But I would never trust any hard rule.

          1. Re: 4, I share John’s question–I believe it has been asked by many commenters: it’s obvious there is no hard rule on how to use supporting indicators to determine strikes, and that your personal experience has allowed you to develop a well-honed sixth sense that serves you well. But what do the “soft” rules look like? It seems I speak for more than just myself, I think many of us I think will be grateful for a general educational post on the VIX, VVIX, std. dev., and the greeks you consider when you place a trade. I have attempted to do some research around this and have acquired individual nuggets from here and there: delta is the approximate probability the option will end up in the money, high vix + sp500 at all time high = no good, theta = your friend when you’re selling, etc. But my understanding is still very fragmented. So far I have been able to find, for example, youtube videos that explain the greeks or the VIX, but no one that presented their theory of how all the indicators fit together. A post like that would be very informative and interesting, if it is something you may feel inclined to write at some point in the future. That said, we all understand you are retired, and are thankful for all information and advice you have chosen to share with us so far.

  26. Dear ERN:

    In one of your comments on your options posts, you said it is best to target a given amount of premium rather than a given delta. I was wondering, given the same premium, would it be less risky to sell more options at a lower strike, but with larger leverage, or a smaller number of options with lower leverage, but of higher premium and delta? What would it depend on?

    Also, if one sells multiple options, is it best to choose different strikes? I’m assuming it is, because of the central limit theorem. In that case, how would you choose the strikes/premium in relation to each other?

    Also, at another point, you said that in addition to the SP500, you watch the VIX as an indicator. How do you use the VIX in your decision making when placing a given trade?

    Many thanks for taking the time to answer.

    1. All great questions!
      There’s no fixed rule. I target a certain premium and a certain delta (~0.05).
      If you were to double the # of options and go further OTM and half the premium you’d lower the risk during sideways and moderate down markets. But you’d increase the risk during the extreme events. It’s a tradeoff. Pick your poison! 🙂
      I pick different strikes bcause I sell puts multiple times a day at whatever strike I feel appropriate at that time. So, naturally I’d have a whole spectrum of strikes. But sometimes I sell all my options at one single strike if I don’t have time to do that.

      I use the VIX to compare to the IV I get from the options I sell. I try to sell puts with an IV higher than the prevailing VIX. Not always possible, though!

  27. Thanks for the post. Is there a link/post where you talk about your current investment allocation in retirement?

  28. Great Karsten.

    Quick question.
    You use 3DTE to cater for big downturn moves such as the March 2020 crash. However, I’ve also read others who recommends 45 DTE. From what I see both have merits and not sure which is better risk wise. Going further out time (45 DTE) enables you to go down further in strike which is “safer”. However, closing out your positions early (3 DTE) enables you less exposure which is also “safer”. The fact that you thrived during the Mar 2020 crash is impressive.

    Would love to hear your thoughts the further 45 DTE methodology!

    Also, do you worry about technicals such as support and resistance for entry to further increase your chances of profit?
    If so, how do you approach your entries when prices run up as the high the prices go up on the underlying, the more chances of it coming back to support.

    Thanks in advance Karsten.


    1. I’m now doing the 1DTE puts. I prefer the short-term risk because that has less gamma and vega risk. And you average over more independent trials => better use of the central limit theorem.

      1. What delta do you use for the 1 DTE on SPX? Do you enter at the open or the close of the prior day?

        1. An ATM option has expreme gamma risk with 1DTE. That’s basic options math.

          But an extreme-OTM option with just 1DTE likely just expires worthless. Even if the trade goes against you, it’s likely going only a few % into the money.
          Contrast that with a 45DTE extreme OTM short put option. Sure, the first few days of decline you don’t have much of a loss. But after a replay of February/March 2020, you have extreme losses. If after 5 days of large losses, even if you went only half-way to the strike you’ll have a large delta and extreme gamma risk now.

          1. So to get the best of both worlds, would it be an idea to sell a 45 dte and close at 50% or I day later, which ever comes first? Would that somehow replicate your 1dte strategy and survive the feb/Mar 2020 meltdown?

            1. What you are suggesting is a new strategy. You would need to test it eg. With Backtesting sw such as OptionVue, Option Net Explorer or others.
              Karsten makes use of the general view that Far OTM Options are getting substantially better risk premiums than closer to the money.
              There is no ‚better‘ strategy as such – you will always improve one parameter at the cost of another one. Karsten‘s strategy has the drawback that if things would go very wrong in a short amount of time (1-2days), his losses could by far outweigh the gains of months or longer. Technically, he also has quite large risks in such a situation. But this ‚may‘ not happen and then he is winning. And if you own stocks without protection, you can face similar exposure.
              It is also a strategy you can do decent returns if markets behave (8-15% if I am not wrong), but you are not making any outsized returns.
              I like this strategy and Karsten is kind enough to share data and help us applying it ourselves.

              1. Hi Thomas,

                Thanks for adding to the discussion. The fact that Karsten was able to survive the 2020 disaster is super impressive.
                I am still a little confused about when to enter new positions after taking profits at 50%. Do you enter the new position regardless of where price is relative to support/resistance level and just rely on delta? If it’s at a new all time high, do you not wait for a pull back to the recent to support as to increase your chance of going with the trend before you reenter? Logically, support levels would be most suitable to enter correct?

                Maybe traditional technical analysis mumbo jumbo do not apply here? lol.

                Thanks Thomas.

                1. I’m not familiar with the long DTE trading strategies. But obviously, after you exit a trade either after taking a large loss or making enough profit, you’d enter the next trade at xDTE again with your delta target.
                  Some folks certainly mix in some technical analysis, but that’s mostly a hit-or-miss, if you ask me.

            2. I don’t want to replicate my strategy with something else when I can just do my strategy. And since my puts expire worthless at expiration (most of them at least) I save the commission.
              But to answer your question, no that wouldn’t replicate my strategy. Others have already commented as to why. 🙂

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