Another Option Strategy Failure: Why it’s “Nickels in Front of a Steamroller” and not “Benjamins in Front of a Baby Stroller!”

My little blog here may be mostly known for the Safe Withdrawal Rate Series. But I’m surprised how many people share my other passion: options trading. Both here on the blog and at FinCon last weekend lots of fans of the blog asked me when I’m going to write something about derivatives again. Wait no more! I have been thinking about this one for a while; it’s another cautionary tale about markets going haywire and unsuspecting and unsophisticated investors are caught in between. And then they realize the “safe” and “conservative” strategy marketed by their financial adviser can blow up in their face!

The Wall Street Journal came out with a pretty detailed article (subscribers only) a few weeks ago, but the story has been around for a while. See, for example, on or And this time it’s not some obscure small shop in Florida that got into trouble. No, it’s one of the big fish: UBS!  Their so-called “Yield Enhancement Strategy (YES),” marketed as a conservative and low-risk strategy to risk-averse investors with mostly bonds in their portfolio, racked up heavy losses late last year. Well, at least people weren’t completely wiped out like the poor sobs in the OptionSellers mess. But a purported 20% loss (about $1b) is still a hard pill to swallow for investors that were told that this is completely safe. Sure, if you were 100% invested in the S&P500 last year and lost 20%, then yeah at least you knew what you’re getting into. But for the average mom-and-pop muni bond investor, a 20% loss is pretty epic. And not in a good way!


Headlines from around the web. Source: Wealth Management, Wall Street Journal, Seeking Alpha

Of course, looking at the low-yield environment right now – in some places we even have a negative-yield environment – I don’t blame investors for shopping around for higher yields. But be aware of the charlatans. If they tell you that higher yields come with no side effects run away! There is always a catch with a higher yield! Even if it’s your trusted personal wealth advisor at a shop as famous as UBS!!! This yield enhancement strategy involved a risky options trading strategy. With 5x leverage! And most of the investors didn’t even know what they were getting into unless they had read the pages with the fine print! So, let’s do a post-mortem for this strategy. What were they doing and how and why did this go so horribly wrong?

Iron Condor! The name should have given it away! This is for not the fainthearted mom-and-pop investors! It’s heavy metal, folks! Source: and

What were they doing?

The UBS Yield Enhancement Strategy involved a so-called Iron Condor strategy. Sounds like a heavy metal band from the 1980s but it’s a pretty common strategy in option trading circles. This strategy involves trading four options, two short and two long positions. Here would be a simple example. The underlying is at $100. You sell a put at 90 and a call at 110. And then buy a put at 85 and a call at 115. The four options create the four kink points in the payoff diagram, see below.

  • We achieve the maximum gain in between the two inner option strikes (90 & 110) when all four options expire worthlessly and we’re left with the net option premium, $1.06 in this case.
  • If you go past the inner two option strikes, losses start piling up because the short option position is now in the money and we’re losing $1 for each $1 we go beyond the inner strikes. The breakeven points are at $88.94 and $111.06 where the loss from the short put or call option exactly wipes out the net option premium.
  • But once we go beyond the outer option strikes, our long option (both on the put and call side) kicks in and limits our losses. The maximum loss is the $5 gap between the two option strikes minus the $1.06 option premium, so a net loss of around $3.94.   (Side note: Yes, I know, all these numbers are multiplied by 100 because that’s often the size of one option contract for both individual stocks and the SPX index options. 50x for e-mini futures options!)
Iron Condor profit and loss diagram at expiration. For market moves not too far away from today’s price ($100) we make a modest profit with a high probability. Past the outer strike prices, our loss is limited.

In other words, the iron condor strategy is a bet on markets staying calm, i.e., we’re hoping for the underlying asset neither gaining nor losing too much. You make your maximum gain in that middle region and you normally set your inner two strikes to cover at least 70% probability (often +/-1 standard deviation). Even as high as 90 or 95% probability. Think of yourself as selling insurance against rare tail events. In other words…

It’s like “picking up nickels in front of a steamroller!”

I love this analogy! It accurately describes the payoff profile of a lot of options trading strategies (for example my put selling approach). Most of the time, you generate modest income but be aware of the occasional steep losses. Again, to really drive it home, there are the 4 ingredients:

  1. Gains are modest 
  2. There is a high probability of gains
  3. There is a low probability of losses (= the flipside of the item above!)
  4. The losses can be substantial

By the way, there is nothing fundamentally wrong with this payoff profile. Quite the opposite, it’s likely the reason why this strategy works so well and generates profits on average. Exactly because it sounds unattractive to the average Joe and Jane who are chasing after the big payoffs, e.g. lottery wins, playing in the casino, etc.! But being the casino is always more profitable than playing in the casino.

“In the casino, the cardinal rule is to keep them playing and keep them coming back. The longer they play, the more they lose. In the end, we get it all.” Sam Rothstein (Robert DeNiro) in the 1995 movie Casino

The P&L diagram of four common income-focused option strategies. Picking up nickels in front of the steamroller!

Payoff profiles with this negative skewness (iron condor, naked puts) often have better average returns than those with positive skewness (long options, lottery, casino). So, again, don’t get me wrong. I’m generally a fan of this type of strategy (though I’d never personally touch an Iron Condor, more on that below). In fact, I’m using my put selling strategy to fund the majority of our retirement cash flow needs. I’m just saying that UBS’ marketing was dubious and the execution and risk management were poor!

Dr Ern Loves Negative Skewness


Which brings us to the first problem with the UBS strategy:

The marketing lie: No, you’re not picking up Benjamins in front of a baby stroller!

The way it was marketed seems like UBS was stretching the truth a little bit, to say it diplomatically. posted a piece of the UBS marketing material, displayed below. Do you notice anything?

  1. Gains are substantial (two arrows up)
  2. There is a high probability of gains (in the central three columns)
  3. Losses occur only during rare, low-probability tail events.
  4. The losses are modest (one arrow down)

It sounds like UBS was claiming that their strategy is equivalent to picking up Benjamins (large payoffs most of the time) in front of a baby stroller (small loss with a small probability). Positive skewness! In a short-volatility strategy!

The UBS Yield Enhancement Strategy as it was advertised. It’s “Picking up Benjamins ($100 bills) in front of a baby stroller” Source: and UBS

So, did UBS square the circle here? Of course not! The payoff diagram is a total lie! It should look like the one below. This Iron Condor should always involve moderate profits in the central region and (relatively) substantial losses if you get to or past the outer strike prices during rare outlier events. It is a mathematical certainty! This is the exact “Picking up nickels in front of the steamroller” analogy. Of course, that would have looked a bit less impressive than the actual UBS marketing materials where they wanted to create the impression of picking up Benjamins in front of something a lot less scary than a steamroller!

“Picking up Nickels in front of the steam roller!” The payoff diagram of an Iron Condor strategy involves modest positive returns with a high probability and large losses with a small probability!

How the hell this nonsense could have made it through the legal and compliance review is anyone’s guess. When I worked in the industry I also talked in front of clients and prospects and our materials were always scrutinized ad nauseam! And we were presenting in front of highly educated counterparts: the fellow-PhDs, the fellow CFA-charterholders running the pension fund or endowment or sovereign wealth fund. You’d think that legal disclosures should be even more stringent when talking to retail investors (even if they are high net worth clients with seven-figure portfolios). If you’re the researcher/portfolio manager behind this product you should have complained about this table! Were you overruled by the salespeople?

Side note: As my buddies in the options trading community will no doubt point out, there is, of course, one way to reverse the maximum profit vs. loss relationship with the Iron Condor. If you were to set the strikes very close to each other, say, for example, a 98$ and $99 for the put strikes and $101 and $102 for the call strikes! The maximum gains would then be smaller than the maximum loss. But the probability of the maximum gain would be very small, the opposite of what you’d normally try to accomplish with the Iron Condor!

How you can lose lots of money with an Iron Condor in a choppy market (e.g. 2018 Q4!!!)

Before we understand how you can pile up heavy losses with this strategy, let’s first go through a best-case scenario, see the chart below. Assume the underlying is at 100 and we sell at strikes +/-10 points (green lines) and buy at strikes +/-15 points (red lines). You make the maximum profit if your index stays within the green lines and you lose the maximum amount if go beyond the red lines (on either side, up or down!). And also somewhere between the red and green line would be the breakeven point but I don’t include this here to not clutter this even more.

The first set of options expires at date 2 (doesn’t matter whether this is 2 days or 2 weeks or 2 months, it’s just for illustration). After 2 periods we set up another iron condor with the same range of strikes expiring at date 4. It looks like the underlying was at 102, so the inner strikes were at 92/102 and the other strikes at 87/117.  Same at time t=4 for options expiring on date t=6. In this best-case scenario, we made the maximum profit because the index stayed within the two green lines at the expiration dates 2, 4 and 6:

Best case scenario for the Iron Condor. The index stays within the inner band of strikes for the maximum profit for all three options expiring on dates 2, 4 and 6. For Illustration only.

How about the worst-case? Same setup as above, but a slightly different path for the index. The index was volatile enough to end up outside of the red lines at the expiration dates. You lost the maximum amount of money on all three options! What I found particularly scary about this scenario is that the index recovered all the initial losses on t=4 but you lost money twice already. (And this is one of the reasons why I don’t normally touch Iron Condors. I don’t want to get whipsawed like this!) And you get hammered on the way down again on t=6.

The worst-case scenario: On each of the three expiration dates, the index ends up outside of the long options’ strike prices for the maximum loss.

And if you remember the fourth quarter of 2018, there have been plenty of occasions where you could have gotten “whipsawed” like that with your Iron Condor. By the end of November, you had three down-moves of 6% and more and two up-drafts of 6% and more. If that didn’t destroy your Iron Condor, then certainly the -15.7% in December and the +15% recovery that followed the trough on December 24!

S&P 500 index in late 2018, early 2019. The sharp up and down moves were poison for your Iron Condor!

What is still a mystery to me, though, is that the UBS-YES was ostensibly backtested over almost 20 years and supposedly never racked up the kind of losses as in 2018. Seriously? Not even in 2008/9 when we had much bigger moves? Strange!

The “we will just ‘manage’ our positions” lie

Maybe a smart asset manager can avoid those heavy losses by closing out the losing positions before they become a problem, right? It sounded like the UBS clients were told a similar story, too. It certainly sounds like a great idea! Wouldn’t that mean that I can achieve a payoff like this one here, see the chart below? We get to keep all that sweet profit between the two inner strikes (90-110) and then chop off the losing side of the trade, say around 88 and 112. Maybe that’s how they came up with their return diagram with the positive skewness?

Can we avoid the worst losses if we simply get out before the worst happens?

But that’s not so easy! Let’s look at a concrete example of what might happen if the market were to move against you. Imagine that after only 1/10 of the time to the option expiration, the index dropped to 90 already, i.e., up to the point where you’d start losing money with the Iron Condor. OK, let’s manage the position, get out while we can still get the $1.06 profit, right? Wrong! That drop to 90 has already caused a loss of about $1.00 in your Iron Condor position, see the chart below. Remember, the blue line is the payoff at the expiration date! Before the expiration, we’re at the mercy of the Option Greeks! And thanks to Delta and Gamma (likely Vega as well), you’re on the red line. And deep in the red! (Side note: this exact problem, namely, that the P&L before the expiration looks very different from the one at expiration also killed the strategy, as I outlined in my post last year. Most of their short-call strikes weren’t even breached and they still collapsed under heavy losses!)

After an initial drop in the index: What now? Get out and lock in the loss? Or take a chance and hope for recovery but also risk an even bigger loss?   Just for illustration.

So, managing the positions is not as trivial and not the panacea that people always want to make it. Because you face the following conundrum: Do you cut your losses and lock in a $1.00 loss or stick with the position? Sticking with the position might still work out after all. If the index simply stays at 90 you’ll not just make back the loss, you’ll even earn that maximum premium you hoped for. You can still get to the blue line! But it can also backfire if the index drops another few points and you lose the maximum possible amount. Cutting your losses can also backfire, especially with an Iron Condor strategy; if you get out too early and initiate a new Iron Condor with $90 in the center and the index snaps back to 100 and beyond you lose again on the way up. You should have just stayed put in that case!


There were at least three warning signs that something wasn’t quite right with this UBS Yield Enhancement Strategy:

  1. You can’t market an Iron Condor strategy with equity index options as a “non-directional” investment to conservative, risk-averse investors who prefer to have no equity exposure. It stays non-directional until – well – until it does become directional! Sure, at inception, you may have a zero delta (equity exposure) but you are still at the mercy of the equity index as the market moves over time (gamma, delta and vega).
  2. The clearly incorrect return diagram that claimed this strategy has positively(!) skewed returns, as opposed to the negative skewness in all the other income-focused option strategies.
  3. Annual management fees of 1.75%. You’ll have to generate a lot of upside potential to make this worthwhile. But if you generate, say, 4-5% returns (before fees) during good times and returns are negatively skewed so that tail event losses can reach 4x or so of your gains then you’re looking at around 20% losses if the crap hits the fan. Which, ironically, is exactly the loss in the UBS product. Astonishing how the folks at UBS were surprised by a loss of that size. Maybe they thought that they can “manage” their positions and get out before losses get too large? But that’s no easy task!

But don’t get me wrong: I’m a huge fan of options strategies. Especially the income-focus strategies are a great fit for folks like us in early retirement. About 35% of our financial net worth is in my naked put strategy. To avoid the three problems of the UBS-YES, though, I heed the following three principles:

  1. I sell naked puts and they have equity correlation. Thus, I would only run this with money that would have otherwise been invested in equities anyway.
  2. Be aware of the negative skewness! It means that you’ll have to budget for rare losses that are many times higher than the gains you target. So, I don’t go overboard with my return expectations!
  3. I do this strategy myself and save the 1.75% management fee!

Hope you enjoyed the post! Sorry if this wandered off into option-math la-la-land! Please leave your comments and suggestions below!

Title image source:


101 thoughts on “Another Option Strategy Failure: Why it’s “Nickels in Front of a Steamroller” and not “Benjamins in Front of a Baby Stroller!”

  1. Wow that’s a lot of information and we are not Financial gurus but I got the gist of it for sure I’m always interested in Reading up as much as possible and everything Financial it’s good to learn both the good and bad sides of every investment

        1. As scary as “options trading” sounds, it CAN be a good strategy for retirees or close-to-retirees who have “won the game” already and no longer need to hit stock market home runs but rather enjoy the steady income of an option selling strategy. 🙂

  2. I have been always puzzled by your love of the naked put option strategy. My understanding of options is rudimentary, but based on how you write about the strategy it would only take one large swing in the index over a relatively short time to wipe you out.

    I get it that you are collecting the premium and over time you are likely to collect more in premiums. However, it just seems odd that a retired person wants to be exposed to the tail event.

    You may say you that you would be exposed anyway had you held an equity fund directly (instead of the selling puts on it), but the outcomes do not seem to be the same (with my extremely basic understanding of options ).

    1. The underlying portfolio that his SPY short puts are overlaid is negatively correlated with SPY. If SPY drops the underlying portfolio goes up and dampens the losses. In some cases the portfolio completely offsets losses and even yields a profit!

      Depending on the entry and exit mechanics chosen, the risk-adjusted return of SPY short puts is greater than that of SPY itself (i.e. smoother ride). However, SPY outperforms on a total-return perspective. At least, that’s what the data suggests.

      The idea is: adding a less volatile product to a portfolio reduces the portfolio’s total volatility, a key factor in mitigating sequence of returns risk.

      Worth noting, the research referenced above is based on a 45 DTE strategy that opens a position daily. ERN uses 2 DTE and enters positions 3x/wk (Mon, Wed, Fri).

      1. I think your comment may be a bit confusing to new readers. In their haste they may not know what “The underlying portfolio” is (bonds) and they may further mistakenly assume you are saying that SPY puts are negatively correlated to SPY underlying which, as we all know, is not true as SPY puts are positively correlated what SPY and all other tradable expressions the the S&P500… short puts are long ∆.

        1. Error of omission on my part!

          Let clarify please a I omitted one important detail. SHORT SPY puts are long delta. Sorry for error of omission. My bad.

  3. On Cory Hoffstein’s podcast this season he had a someone on who mentioned the growing popularity of strategies like your put writing strategy. Does this possibly decrease the expected returns for that strategy?

    On a tangential note, what do you think about this ETF?:

    Seems similar to what you have advocated in the past; not exactly 80/120, but better than nothing. Maybe you should start an ETF!

    1. How much growth in popularity would there have to be to have a discernible effect on returns though? Am I naively assuming that it would have to be pretty big?

      1. Probably a lot, but he was talking about a lot of action by large institutions. But yes, you’re right, enough to move the needle, who knows? The episode was interesting: “Flirting with Models” with guest Benn Eifert.

    2. Thanks, Trent!
      “Does this possibly decrease the expected returns for that strategy?” Possible! But a lot of these short-vol-style strategies also blow up (the XIV ETF, UBS-YES) so this has always been a niche market and invstors seems to leave this space as quickly as the come in, so the net flow might not be so large.

      I like that ETF’s idea. Reminds of something we did for institutional investors when I still worked in the industry. I’d still do this myself and save myself the 0.20% expense ratio, though! 🙂

  4. Have you ever looked into doing a synthetic leveraged position with options, by buying calls and selling puts at the same strike price? I’m curious whether that would have higher expected value than just buying the regular stock.

    1. This incredibly common structue (“combo”) is identical to buying the stock. As you mentioned it is being ‘synthetically’ long. If you want leverage gearing in the stock/index of interest you can do this structure on a larger notional then your capital would cover(1 combo per 100 shares) or you can use margining. If the puts are naked it’s the same risk and you would have to wrestle the margin bear either way come stormy weather. In the case of the combo portfolio you won’t have margin interest to pay. I mean no offense here, but while it’s never harmful to ask questions, in this case if you have to ask you should most definitely not do it. 😉

    2. That depends on your bullish or bearish assumption. Selling a put to finance a long call is normally considered super bullish strategy. You are right that selling a short ATM put and buying a long ATM call is equivalent to long stock with 100% long delta). Just make sure your bullish assertion is correct before entering the position and also make sure you have a back-up risk mitigation strategy in case your assumption is incorrect.

    3. Yes, you could to a synthetic long SPX through that. Through the Put-Call Parity relationship:
      Underlying = Bond + Call – Put (with same strikes)
      It’s probably easier to jut do it through an e-mini Future.
      And yes, the expected return will be higher, but so will be the expected risk! 🙂

  5. Thanks for writing about options trading again. I started implementing your naked short SPX put selling strategy about five months ago. Up until the end of July I had never experienced a loss, but in early August the inevitable tail event finally happened and wiped out all my options trading profits for the year plus more. I got to see what happens when the steam roller catches up!

    I did not follow your strategy precisely and the reason for the big loss occurred because I sold another set of options too early (about a trading day and a half before my first batch of options were set to expire). I ended up taking a $26,000 loss on 4 SPX options I had sold mid-day for $400 in premium. They were 5 delta options but did not expire until 3 1/2 trading days later. I thought they were pretty safe at the time being about 100 points OTM, so I could have survived a 3.3% drop before hitting the strike price, but the market ended up dropping 160 points (about 5.5%) over those 3 short days.

    Had I not jumped the gun by selling the next batch of options early, my losses would have been minimal. It was a valuable lesson for me and one I will not soon forget – since I learned the hard way. This strategy takes discipline and is not for the faint-hearted. By the way, I have recovered most of my losses for the year since then and am nearly breaking even now.

    1. This situation is exactly what I have wondered about Karsten’s PUT selling strategy – maybe he will chime in here. I have wondered that if the short PUT position goes against you during one of the trades and thus you get assigned, I would target to take the assignment and then manage it accordingly. However, I would not sell another short PUT position that week until I managed the assigned PUT position to closure.

      1. Thanks Dave, SPX options cash settle so there is no actual assignment of shares when the put options expire in the money. You just have to make sure you have enough cash in your brokerage account to handle the settlement. In my case, that meant selling some of my municipal bond ETF, which is what I use to fund my options trading account.

        Your point about not selling another short put until you had managed the previous put to closure is exactly right. That was precisely where I went wrong! After five months of smooth sailing, I lost sight of the risks involved which are not insignificant. I tend to learn more from my mistakes than my successes.

        1. @Stephen Richardson
          I was just catching up on the comments here and saw your post about what happened in August. I’m sure you saw my comments already over at the other blog post but this is why I trade with a stop. I actually do similar trades across a range of short time frames (0,2,3,7 DTE) with stops from 1-2x the credit with SPX and RUT. If you’re curious I also publish my tradelogs, you can take a look at the performance metrics and see how each had played out this year so far. The link is below:

        2. Thanks for the clarification – I was thinking in the context of SPY related to the assignment comment. Of course, you would need to add 10x the # of contracts for SPY to meet SPX notional.

      2. Occasionally I suffer a loss. The loss is cash-settled and I consider it water under the bridge.
        I then sell a new put (probably wildly out of the money) and start my path to making the money back. Slowly! See my Part 3 of the Put selling posts on why: Central Limit Theorem!!!

        I would never try to “manage the assignment” which means (if I understand you correctly), taking delivery of an ES future (back in the old days when I still traded futures options – but keep in mid that now SPX options are cash-settled). The problem is that now you have a 2.5x leveraged equity position. If the market goes down further that would be a problem.

        1. Yes, I should have clarified as I was thinking in the context of selling Puts on, for example, SPY rather than SPX when I referenced assignment.

          1. It’s one of the reasons I prefer not to trade the SPY options. I like the cash settlement and like to always initiate the next trade again way out of the money. Only then the Central Limit Theorem works! 🙂

        2. Hi ERN, I used to do some at or near the money PUT selling on individual stocks that I would have bought lower anyway. With mixed results and some nail biting moments. So my question is: if you sell at or near the money SPX puts and in the unlikely event the next day the market goes down 22% like it did on October 19 1987, is your loss 22% offset by the premium you earned? Thanks. Andrew

          1. Yes it will be offset by the premium but that will be a pretty small amount compared to the losses you will have if the market goes down 22%. That’s why I trade this strategy with a stop loss order. The overall P/L is reduced but it smooths out the volatility of your portfolio. It’s a trade off that may or may not be worth it depending on your risk tolerance and investment time horizon.

    2. Yeah, August was a volatile month. August 5 was the first time I had a small loss since December last year. Depending on when you sold on August 1, you might have suffered just a few points in the money or 65 points, which is a pretty massive loss.

      1. Ah yes, that was the day that will live in infamy! I had sold my four puts on August 1 mid-day with a strike price of 2910 right before the market dropped about 2% intra-day. At market close on Friday the 2nd SPX was only 22 points above the strike price and I was crossing my fingers Monday wouldn’t be too bad. Well, of course the market dropped 3% on Monday the 5th. Ouch!

        Had I sold them on Friday instead of Thursday I think I would have been fine.

    3. I too, took a hit in August, but was following the plan and paying close attention and closed my position a day early at the break even point, which resulted in me paying a large premium to do so. I’ve already recovered that premium in and have a nice profit so far for the year.

  6. To maximize the probability of success, one should not sell ICs regardless of the implied volatility of the underlying. Perhaps one should choose to sell short Strangles or ICs only when the ranking of the implied volatility is higher than say 50 or higher, and close the trades when the profit target is met. I don’t know how those so called UBS professionals manage their ICs. The risk management of such a portfolio starts at order entry (i.e., whether you should or should not enter an IC trade given the market conditions). Normally, a typical way of diversifying a portfolio is to diversify allocating different assets with different correlation to the market. If the UBS professionals are going to use options as a means of generating incomes, they should not have used only one option strategy, IC in this case, regardless of the market circumstances. If they are professionals, they should know better and a variety of options strategies should also be used as a means of strategy diversification to mitigate risks and the portfolio volatility.

    It is always beyond me sometimes the professionals don’t know any better than the rest of the people.

    1. Good point. I certainly noticed that my short-vol strategy works best when vol is high. And it can hurt the most when IV is low at inception and out of nowhere comes a shock (Feb 5, 2018!)
      But then again: IV was pretty high during Q4 2018.

      1. It introduces a sort of perversion where I actually wish for the index to drop (just not to my strike) and for VIX to be high because these puts tend to be way OTM and have really juicy premiums.

        I’m most afraid when the index is rallying like it was when I sold the puts on Wed.

        1. Exactly the same – i had a bad feeling on Wed… but we still go up… i reduced NOW Friday my Delta from 5 to 3 i can‘t go on with a strike with just 1% low the index! Want to have at least 40 Points or 1,5%

          1. Same here. I sold with a lower premium than my usual target of $0.75. Maybe it’s psychological but I feel like slow and steady gains rather making a loss to chase a slightly higher premium.

            I still have my minimum premium otherwise it wouldn’t be worth it.

                1. Set a stop order to close the position at a certain limit. I use a very right stop of 1x the credit received. For example, if I open the position for $0.6, my stop trigger price is $1.2, which would net a loss of $0.6. I created a backtest using SPX options data from 2018 so you can see the effects of using the stop. Delta levels and stop limits can be adjusted dynamically and you can view how the P/L and a bunch of the metrics (win rate, stop rate, premium capture, etc) are affected. I found that a tight stop can but down the volatility of the trade a LOT without hugely reducing the overall profitability, especially at 5 delta. The link to the backtest is below:


                2. There’s three problems with stop losses on SPX options though. If the SPX gaps down overnight, you won’t get a only a 1x loss. Secondly, you hit the bid instead of near the mid which will cost you extra on the trade. SPX is pretty liquid but will be about $20-30 per spread. Third, you lock in a loss that may have reverted back above your strike.

  7. I’m so happy to see another derivatives post.

    Just goes to show that it’s easy for someone to play and lose with your money.

    I just received an anniversary email from Interactive Brokers and it dawned on me that I’ve been using your option strategy for a year now. It did not start off very well because I chose to start it at the worst possible time and wracked up huge losses as well due to still learning the ropes.

    A year later and my returns are more than my passive ETF portfolio. Although the magnitude of return is low because my portfolio value is so small.

    With the index being so high, it’s making it very hard for me to pull the trigger and keep DCA into ETFs. I wonder if I should just ignore and buy, or can the option selling strategy be a way to “time the market”?

    What I mean is, instead of buying parcels of ETFs, use the cash to sell options when the index is high. The problems is probably the same with any market timing strategy, you never know when the index is trading “too high”. It could keep getting higher.

    Enough of my side tangent. Love the article and hope to see more derivatives content 🙂

    1. Thanks Bob! Congrats on the 1y anniversary! Glad the average return was good and you navigated through some rough times (Q4 2018!!!).
      My returns also look really nice (better than stocks!), but what I like even more: the volatility of my short-put account is less than the equity ETFs! That’s very comforting for a retiree! 🙂

      1. Any thoughts on my idea of using your options trading strategy as a form of “market timing”?

        Directing contributions into this strategy instead of DCA’ing into ETFs?

        I think the flaw is probably that we never know when the market is “too high” and could end up missing out on gains.

        1. I have directed most of our new savings over the last few years into this strategy. Worked out pretty well.
          Especially when you already have a large chunk of equity holdings. With today’s lofty valuations, it’s best to diversify/market-time away from equities a little bit!

            1. Yup! That would definitly be on the table!

              Of course, if the S&P drops only 20-30% in the next recession it may not be enough to really move much back into equities. Then I might just continue with the option selling.

              1. Thanks Karsten. I still find it amazing that we are so lucky to get to pick the brain of someone so knowledgeable like this.

                It feels like we would owe you so much if you went into consulting haha.

                Please keep posting even if you make it even bigger. 🙂

  8. Hey Ern,

    another great post! When I was very unexperienced trader/investor 12 years ago I did similar – selling iron condors. I bought option trading course from some “professional option traders” (LOL) and learnt that selling iron condors is for stable income with some occassional moderate losses if you manage your positions (LOL).

    The system was pretty easy: every thrid friday of the month sell put and call SPX with delta less than 0.1 and expiration +-30 days (get premium from 0.8), buy put and call 10 points above/below short options and manage opened positions for risk/reward 3:1, so for $1 premium, close the whole iron condor when open loss is equal or more than $3. And thanks to managing these losing positions you can trade it on a way bigger leverage then unmanaged iron condors (LOOOOL) based on their detailed backtests.

    It took me a while (I think 4 or 5 months) to figure out this was a total piece of shit, even more shit for equity markets which tend to go long over time so your sold call options will be very often under the stress.

    Result of this strategy was:
    1. month full profit (woohaa)
    2. month full profit (yupeee)
    3. month full loss – more than 3 times a profit because of a) trading fees, b) bid/ask spread, c) delay in closing position (ufff)
    4. month partial loss – around 1:1 risk/reward (hmmm)
    5. month full loss – more than 3 times a profit (fuck!)

    Meanwhile SPX was up about 5% (LOL) and I had loss of about 20%. Fortunately I was college student so I didn’t run this strategy with some significant amount of money. Lesson learnt, managed iron condors are bullshit, unmanaged iron condors can sometimes work if you expect sideway markets for a longer time.

    1. Haha, thanks for sharing that! That is a common history of the options-to-get-rich-quick classes out there. If it’s any consolation, I also lost a lot of money when I started this (too much leverage!)…
      So we all pay our tuition before we get this to work! 🙂

        1. If you addressed me, I was using around 7x leverage, where leverage is expressed as strike price times multiplier times # of options divided by the equity in the account. Didn’t work so well in August 2011 during the U.S. credit downgrade mess. 🙂
          Now using maximum 2.5x!

          1. Oops I was addressing you. I’m not sure if I clicked the wrong reply button.

            What happened to your account with 7x leverage? Would it have recovered using the same leverage if you kept at it?

            1. With 7x leverage and selling options with 4 weeks to expiration I lost 60% during the August 2011 mess.
              OK, it was only play money but I learned my lesson, put more money in the account and ran the whole thing at less leverage.

                1. Hi Spintwig. How is that 2DTE test coming? 😀 We all look forward to read it. I too am still undecided between 45 DTE and 2 DTE or something in between. Of course you get much bigger premiums with 2DTE, but the gamma can kill you. On the other hand with 45 DTE premiums are smaller, but you have much less gamma risk and can handle big sell-offs without any loss or by the time option would expire loss is already turned back into win.
                  I have different story selling puts on CL.. Got badly burned last year. Worked ok while selling 3-6 months out, but then good greedy at exactly the wrong time and started selling weekli crude options just before big 30 points multi month sell-off. I returned all my 2018 profits.. Things would turn out much better had I stayed with a few months out option instead of weklies which picked up delta along the sell-off much faster.. I did recover all of it in the next few months but now I know how it feels in weeklies when shit hits the fan and you dont hedge or use stop loss.. I tried to roll my way out but with more and more selloffs coming there is not way to do that. You sel 10 delta, which becomes 50 delta and mounts your loses and you cannot get out of this shit with selling 10 delta further out, because you alredy took a hit.. I think most of optionsellers do not realize this. Yeah I will just sell further out and it will be ok. No it wont. If you want to recover you have to sell further out but keep delta, which would mean selling ATM or even ITM..

                  Also one overlooked aspect is selling with more DTE and constantly rolling to keep delta. If you sell 2 months out and SPY goes up you get MORE money with 2 months out option than you get with 2 days out, because 60DTE decreases more than does 2DTE option.
                  You can then just roll to different strike to re-set to desired delta exposure. This way you keep constant like 0.30 delta exposure and adjust, but only on up moves. If SPY goes down you wait it out and have safety net.. Many ways to skin the cat.. 🙂

                2. “Commodity futures and commodity options are really risky! That’s the one that sank the product!”

                  I agree, but the premiums are much bigger. What killed is leverage. They used something like 50x leverage. Believe me, that kind of leverage would kill any ES or SPX or SPY seller too. You do not even need 2008 event. 2018 february or december is enough on that high leverage.. And natural gas it not named “widow maker” for nothing 🙂 This is the only commodity I do not touch anymore.. There are others that are much safer and a lot more predictable. No other commodity can double in a week or so, at least not to my knowledge.. But nat gas can jump 100 % or more in a flash..

                  Check premiums on crude oil. You can get 700$ for selling january 40 put.. This is like 25 % below current price. And I doubt oil will stay long at 40 level. I would be willing to just buy futures contract at that price and go long oil. Not long before OPEC and other exporters would cut production and send price back up.

                3. “Haha, that might still be a hard-earned $700 given the vol in crude oil! But you’re right, might not be a bad idea to branch out to different risk premiums.”

                  true that, but I saw a paper recently discussing just that – selling volatility on various products and the respective sharpe ratios. And guess what. Selling volatility on commodities was the only strategy with sharpe above 1. I think it was 1.2 or so. All others had sharpe at about 0.8… So there might be something there 🙂 But I would for sure avoid natural gas 😀

                4. Yeah, very true. Well, if optionsellers HAD stuck to their risk model, 5% risk budget per commodity and 50% extra reserve they would have made money on their trade, in the end! 🙂
                  So, maybe it’s not a bad idea to check out some other vol premiums. I’m still considering it. Would have to be an Iron Condor, though, not a short strangle.

                5. Looks like we hit the comment thread depth limit; replying to @Tomaz

                  I’ve been doing preliminary research today. It’s a bit tricky as there are some setup / methodology challenges that need to be addressed.

                  For example, options expiring ~2 DTE occur far less frequently than options expiring ~45 DTE. This limits the number of occurrences and exacerbates timing luck (think dodging most of the GFC since there simply were few periods of time when ~2 DTE contracts existed). This can have a significant impact on depicted performance.

                  Deltas widen significantly between strikes at the short duration horizon so the granularity of delta bands needs to be coarsened.

                  It’s a work in progress. I promise to publish something soon. No promise on dates though.

                  BigERN, are you open to doing a shared / guest post or shoutout with the data?

              1. I was too young/naive to following the financial markets back then. What happened in August 2011?

                While nobody would advocate 7x leverage, would that much leverage had worked with the current two days to expiration strategy?

                1. General “Angst” about another recession, uncertainty about Europe and then the U.S. Treasury ratings downgrade. Which incidentally sank stocks while Treasurys rallied. Go figure! 🙂

                  I never checked how the 2 DTE version would have worked, but that might have worked a lot better, because IV was creeping up and by rolling 3x a week I might have just avoided the worst. A little bit like Q4 2018. But at 7x leverage it would have still been scary!!!

          2. Glad to see you are down from 3X (from a recent post of yours) to a Maximum of 2.5X. I always use full notional in the numerator as you have here. I won’t even start levering until storm winds are blowing and vol explodes and even then it’s scaled into. That said, it is alway a bit of a ride when leaning into elevated volatility. One of the best things I have ever learned in the past two decades is to always leave room to do more and always, always ,always be able to stay in the trade and have a plan to do so. The period that began early Aug. 2011 was one of the best environments for shorting volatility since 2008 BUT ONLY!!! if you were not anywhere a full allocation before the credit downgrade.

  9. ERN,
    Kirk Duplessis at says the right way to manage an IC at risk of breaching the breakevens is to adjust the unchallenged side toward the new price, thereby collecting another net credit. This can be repeated multiple times. The net result, he says, is that your probability of loss and the size of that loss is something less than what is implied by the options prices at the time you originally entered the position. He posts case studies where the loss was mitigated or erased by multiple credit-generating adjustments. The idea is to either win the gamble or leave yourself a way to mitigate the damage when you lose. Over hundreds of trades with small position sizes, he claims to make consistent profits. That said, this is a person selling investment advice on the internet!!!

    What do you think about the strategy of tightening an IC on the unchallenged side to get another credit?

    1. The IC strategy is one of the most commission intensive option strategies out there. Adjusting the untested side for additional credit exacerbates this.

      The premium collected is not worth the risk of whipsaw on what was the “safe” side.

      Perhaps I’m mistaken, but doesn’t Kirk’s company introduce traders to the TDA platform?

  10. Are you still selling puts in today’s crazy environment? Do you sell puts in a bear market? Are they just deeper OTM?

    What if you just made your iron condor strikes super wide so you wouldn’t get whipsawed?

      1. What sort of strikes and deltas have you been targeting lately? With the recent rally and drop in the VIX, the types of strikes I’ve gotten feels like it wouldn’t survive if we have two of those 150+ drops in a row.

          1. Hmm, I’m a bit higher at 2575. I’m still trying to learn your ways.

            You initially went from targeting -0.05 to -0.03 during the initial spike in vol.

            How do you decide when to go down to -0.016?

              1. What premium did you target over the Easter break? I think I ended up with $1.05 for that strike.

                Sorry to keep bombarding you with questions. I feel it’s so lucky to be able to pick the brain of a Doctor of Economics like this.

  11. Hello, In the first example at the 4th paragraph shouldn’t be “buy a call at 85 and buy a put at 115” instead of the other way around?

    You have very good articles. thank you!

  12. Hello Big Earn,

    i am new to your blog – at least I have not commented anything before. I intend to try out your option selling strategy with a lynx depot (subsidiary of IB) from Germany in the next month.

    My question is what do you do if your options develops into the wrong direction until it is into the money? Do you try to sell these options before expiration or do you keep them until the end? On what conditions and with which considerations?

    As a matter of fact in Germany we have to pay 25% tax on all wins. So we are not in the same luxury condition than in US or Switzerland. But as this applies to all financial products equity, bonds, option etc. option selling is probably still better.

    What I like most about option selling is that
    1) it works in bull AND bear markets. (Up to now I do not trade puts.)
    2) the margin capital stock still works for itself, so it is an on top win.

    Best regards from Schwerte (Dortmund-Süd),

    1. Hallo Gerrit! Viele Gruesse zurueck nach Deutschland. Go BVB09!

      I sell the puts with an extremely short duration. I simply let them expire. Normally, the damage is limited with just 2 trading days to expiration. There were many instances where I almost lost my nerves and then the market recovered and I would have locked in a big loss had I bought the puts back at a loss.
      If the puts do expire in the money I eat the loss and move on and try to make the money back!

  13. Hola Big ERN,

    What do you think of combining this strategy but with your naked put selection approach? This is, using a +/-.05 delta for selecting the option sells (which can be lower if i.e. VIX is high) and maybe a .01 for the buys (or directly a X number of points for having a fixed risk once that you have volatility into account thanks to the delta of the sells)? I was thinking of doing iron condors with 0DTEs, on paper it seems quite good, but I am very likely missing something, so I would love to hear from you.


    PS: I think that lately you moved to a .10 delta and reduced the number, but anyway, I think you’ll get the point

    1. Iron Condors cost too much commission to trade daily.
      I like the idea of selling a few way OTM bull put spreads 60-90 DTE. Say, at 40% OTM with a 100-300 point spread. I do that occasionally to make a few $ here and there. But my bread and butter is the 0-1DTE put selling.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.